EDMOND — Risk is a funny thing. Everybody loves it when it works out, but it can be quite painful when it doesn’t. I learned a lot about risk from a cat named Vern. Vern was a cat I had years ago; or I should say that Vern had me. He wasn’t anything special; just an ordinary gray barn cat. But he was special to me and made me smile and laugh a lot. I loved that old cat.

Vern was a house cat meant to live his life protected indoors. The problem was that Vern didn’t seem to know that and never missed an opportunity to be out hunting for whatever it was that he liked to hunt. Unfortunately, in the real world the hunter can sometimes become the hunted.

As long as Vern hunted during the day, the risks were fairly small. He almost always managed to come home about dinner time carrying his trophy from the hunt, much to the dismay of my horrified daughters. But nighttime was a different matter. The big hunters came out at night and the risks got a lot higher and the odds changed against him. As hard as I tried to prevent it, Vern often managed to find the right moment to bolt out the door and he was off for the night. He always came home; although more than a few times he looked like he got the worse end of a fight. At least he made it home.

I never understood why he would never abandon the thrill of the hunt in exchange for the comfort of watching TV and eating snacks with me in the easy chair, but that’s just the way he was. The good news is that Vern was lucky and lived a long and happy life.

This is not a story about Vern, though. This is a story about risk. More specifically, it’s about asymmetrical risk; when the risk in one direction is far greater than the other. This is the risk/reward equation people talk about but rarely consider. An example of asymmetrical risk is catching a plane. If you arrive too early, you waste some time sitting in the airport. This is unfortunate, but it’s tolerable. If you arrive too late, you miss the plane altogether. This can be expensive and very inconvenient.

Asymmetrical risk has nothing to do with the odds of a given risk, but everything to do with the consequences of a given risk. In Vern’s case, the odds that a coyote would kill him were relatively low and the odds were hugely in his favor. For example, let’s say the odds were 50-to-1 in his favor. But the consequences of that risk were incredibly asymmetrical.

In our hypothetical 50-to-1 risk, Vern returns home alive 50 times out of 51. But one time in 50, the coyotes kill him. By the numbers, that’s a good risk. In reality, that’s a horrible risk. No investor would take a bet like that — at least not knowingly.

As investors, we can’t afford to turn a blind eye to risks, especially not to asymmetrical risks. We can’t afford to take risks that are likely to work, but are likely to wipe us out if they don’t work. Understanding your potential reward is worthwhile. Understanding your potential risk is everything.

We hear a lot about risk versus reward. If someone were to ask, “How did you do last year?” (with your investments), an appropriate answer might be “Compared to what?” You see, if you were to measure your performance against the S&P 500, which was up 12.88 percent in 2010, you might not have done as well if you had been quite conservative with your investments.  What if you were conservative and only made 5 percent? Is that bad? Well, if you compare it to the overall stock market, yes. However, if you compare it to the risk-free rate of return, that was pretty good if you didn’t take a lot of risk doing it.

The “risk-free rate of return” is a term analysts use to identify what you could have earned without taking any risk. Typically that is something like short-term T-bills or CDs. In a time not too long ago, you could have earned 3 percent in T-bills or perhaps 4 percent in a one-year CD, all guaranteed and no risk.

If you could make 4 percent on a risk-free investment (and were happy with that), but instead you invested in a diversified portfolio of stocks and bonds and earned 5 percent — well, that’s not too impressive. In fact, it’s pretty awful given the extra risk you had to take to make 1 percent more.

Today, however, the risk-free rate of return in T-bills, money market funds and CDs is almost zero. Given that scenario, if you managed to earn 5 percent in your portfolio and you took a minimal amount of risk doing it, then you might consider that fairly significant excess performance. Oh sure, making 12 percent in the market is far better; but you have to consider the extra risk it would have required you to take to achieve that. In retrospect, if you had done that in 2010, it would have worked out and you would have been quite happy. But what if it didn’t? In January 2010 you didn’t know for sure that was going to happen. In fact, there were many times during the year that it didn’t look like that was going to happen at all.

The point is no matter how much we try to ignore it, risk versus reward is a factor we constantly have to measure. Big returns are nice, but how would you feel if the opposite happened? Many people experienced that firsthand in 2008 and found out the thrill of victory may not be enough to offset the agony of defeat when it comes to investing. Unless you’re truly an aggressive investor who can stomach occasional big losses, don’t measure your investment performance against the stock market. Measure it against the risk-free rate of return and stop driving yourself crazy. In the words of Bobby McFerrin’s song, “Don’t worry, be happy.” My pal Vern beat the odds. You may not be so lucky. Thanks for reading.

NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com.  Securities offered through Securities Service Network Inc., member FINRA/SIPC.