A pressure relief valve on a water heater allows excess pressure to escape so the tank doesn’t explode!! This made me think of assessing financial risk.
I was recently working with a client to analyze a large financial investment. There are many unknowns and some risk involved, so we walked through each scenario and identified the “pressure relief valves” they could utilize if things don’t go as planned.
Here are some examples:
- Maintain a larger than normal cash reserve in case cash flow gets tight
- Keep loan to value low to reduce the liquidity risk if the investment value drops
- Entertain the possibility of selling the investment down the road. This can be hard, especially if it’s a long term dream, but it’s a good exercise to imagine the “loss” if you must sell it down the road.
- Be honest about any pressure or stress you will feel once you own it. This might include less disposable income, requirement to work longer, force you to adjust your priorities, etc.
It can be helpful to identify your “pressure relief valves” when assessing a decision that involves risk!