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The key to risk management is to pay attention to both the big picture and the small picture. Here are five basic ways I’ve learned to manage and mitigate risk.
1. Be prepared and in a basic position
As a high school soccer player, I learned that when it comes to defense, you always have to be prepared for anything and be in the “ready position.” We also called this the “basic pose,” where we stood with both feet firmly on the floor, shoulder-width apart, legs slightly bent and ready to jump in any direction, both arms hanging straight down, hands just above the knees, ready to do so Drop a block or make a tackle and keep your head up and your eyes alert.
This preparation helped me when I took the biggest business risk of my life and started my own company. For eighteen years I worked in five different cities for four companies with six different bosses. I made many mistakes and learned many lessons. Through all of these efforts and experiences, I had become competent in my field and was confident that I could make this company a success. Without this expertise and trust, I would never have been able to take the risk that led to my business success.
Related: Do you want success? You have to take risks. 4 Benefits of Risk Taking
2. Diversification
The theory states that different asset classes (e.g. bonds, stocks, real estate, oil and gas) are uncorrelated and move in different directions at different times. Diversification can be applied to every aspect of your life. By having more variety and balance in your life, you will be less dependent on one thing in particular and will be able to cope better with loss.
Early in my career, shortly after my wife and I began expanding our family, I realized that I could only have time for three priorities: family, business, and health. There was no way I would sacrifice any of it. I didn’t miss any of my sons’ games, performances, or important activities. With a few exceptions, I coached their teams and was home every evening for family dinner. I usually worked Saturday mornings, but on weekdays I was never in the office later than 6:30 p.m. or out entertaining clients until midnight, and I also found time for exercise to keep my energy and sanity.
3. Ripcord
In business, the best risk managers have an exit plan for every significant risk they take. At Amazon, the fastest-growing company in the world, they call it “the double swinging door.” This means that for every door they go through (risks they take), they need the ability to turn around and leave. They take a lot of big risks but always have an exit plan to mitigate or limit their losses. Then they do their best to make it work.
At Trammell Crow Residential, we used a similar strategy in the 1980s called “Ripcord.” We negotiated an exit strategy for every investment made. If the deal fell through, we made sure we had a “tear cord” we could pull to minimize our losses and parachute to safety. The real estate developers who did not practice this principle became “victims” of the recession.
Related: The Entrepreneur’s Guide to Taking Calculated Risks
4. Alignment
General George S. Patton once said, “Take calculated risks. That’s very different from being rash.” One of the less discussed principles of risk management (which I didn’t really learn until late in my career) is the power of alignment. By alignment, I mean that your values and goals align with the people you are connected to in your business and personal life.
Our values in the home building business were clear: quality, customer service and profit, so the alignment with our trades was usually pretty good. But it will be much more difficult to align philanthropy and investment in new ventures. As they say, the Japanese translation of “joint venture” is “same bed, different dreams,” so it’s important to have the same dreams as your partner. I learned that you can take risks with markets, but not with people. Dealing with people of integrity is essential.
Related: Here’s what science says you should do to achieve more success
5. Balance
This is a physical principle that can be applied to business and life. The basic idea is balance in both areas. In other words, how can you regain balance when the situation becomes a little unstable or out of control?
One way to stay in a stable balance is to do business and maintain relationships with people you know and trust. We can all interact with friends, enemies, or strangers, but if we choose not to interact with friends and people we trust, we are dependent on enemies or strangers, which is essentially an unstable equilibrium.
We can avoid unnecessary risks and are much safer in a stable equilibrium position. So avoid putting yourself in a vulnerable position in business or personal relationships where a small shock could trigger a life-changing catastrophe.
In conclusion, you cannot go through life without taking risks. So be someone who strives, takes smart risks and gives it their all. And if you lose, which sometimes happens, get right back up and get back into the arena. This is a life without regrets and a life worth living.