Risk-Adjusted Return Thinking is Golden
If you are not living to your potential or satisfaction, consider a major change, including where you live.
The Olympics invariably elevate individuals who defy the odds and inspire us all. Perhaps no greater example in the 2024 Olympics is rower turned venture capitalist turned gold medal cyclist Kristen Faulkner. Remarkably, she didn’t start riding a bike until seven years ago. She saw her potential and put her finance career on pause to pursue cycling.
Her background as an investor helped her appreciate how to assess risk and she applied these principles to focus on cycling with the pinnacle of success.
“A lot of what I learned to do is how to take calculated risks, how to assess risks,” she explains. “If there is high risk but the reward is high, it may be worth it… What is the risk-reward of being patient versus being aggressive? That’s something I definitely take with me.”
Her bold move in the final kilometers of the 158 km race secured her victory. It was a risk with upside worth taking.
Risk-Adjusted Return Thinking is For All of Us, Not Just Investors
The term “risk-adjusted return" is a financial metric that measures the return of an investment relative to the amount of risk taken to achieve that return. It provides a way to compare the performance of different investments by considering both their returns and the risks involved.
The best investments get outsized returns relative to the risks taken. (For the graph above, it would involve investments above the line.)
Risk-adjusted return thinking is foundational for scores of investment professionals, but the principles are valuable to us all, as Kristen Faulkner illustrated. Any decision we make (or not make) involves risk and a potential return. Analyzing every decision, no matter how small, through the risk-adjusted return lens would be a bit much; but, for big decisions, carefully plotting potential risks and returns is certainly appropriate.
Applying Risk-Adjusted Thinking to Healthy Longevity and Place
Leaning on risk-adjusted thinking is valuable in making the big decision of where to live for each stage of life. Where you live is more than just a place to hang your hat or a financial line item; it fundamentally influences your well-being. Some places can bring out the best in you, others less so.
Step one is to assess the fit of your current place relative to your current needs and preferences. It is important to incorporate the dimensions for which place influences your life, including the physical dimensions, health, community, and finances. (Taking the Right Place Assessment can be helpful.)
Step two is to assess the fit of your current place relative to likely or anticipated changes in the near future (a window of one to three years can be appropriate). For example, if you expect to retire within the next couple of years and your area doesn’t support the types of activities you are likely to pursue in retirement, your current place may be less attractive in the future than it is today. This realization can be helpful for your planning.
If your place is not aligned well with either step one or step two, it may be time to work on identifying a better place.
The Value of Options in Place Planning
When identifying the best risk-adjusted return investment opportunity, it is helpful to have a number of options to consider and compare to each other. It is the same with place planning. It is important to have a number of housing alternatives to evaluate, including improving your current place (without moving), relocating to a different home within your existing area, or moving outside of your area. Each potential option has its own risk-reward trade-off.
Some options are inherently riskier than others, such as moving to a new area you may not be familiar with. In such cases, it is particularly important to vet these options to help validate the perceived risk and reward of such a move. One strategy is to visit or temporarily move there to see if the option is as risky or attractive as it may initially seem.
Don’t Be Afraid to be Bold
Kristen Faulkner’s bold move at the end of the road cycling race was a calculated risk. The upside justified the aggression, and she won gold as a result.
If you are not living to your potential or satisfaction, consider a major change, including where you live. Moving to a different place shouldn’t be made on a whim, but a switch may be just what you need to level up your life. You can tell others that Kristen Faulkner inspired you.