Understanding the risks involved is an important part of decision-making. Most would agree, I think, because how can we make informed decisions without weighing the consequences?
What makes it tough, however, is that a lot of financial planning literature uses the word “risk” when they’re actually talking about volatility. It’s about as helpful as the local news personality letting us know that weather is ahead: “There’s a risk of weather today! Heads up, everyone.”
How would that possibly help us make informed decisions?
Instead of railing against the presence of weather—or gravity, or any other to-be-expected force!—we like to spend our energy paying attention to risks that can actually affect our long-term goals.
Recall that in our shop, risk assessment takes place with a long time horizon in mind. We believe that you should have the money you’ll require for the next 3–5 years invested outside of the market. (Short-term volatility is a risk during the short term.) If you’re parking your money with us for a longer time horizon (3+ years), here are some risks you can expect we will factor into our strategy:
- Concentration risk. Too many eggs in one basket could spell trouble if the basket upsets.
- Inflation risk. Over time, what’s the likelihood this investment can outpace inflation? Put another way, what’s the risk of losing purchasing power over time?
- Investment risk. What’s the likelihood that this investment will substantially change for the worse as time goes on or that the players could go out of business?
How much risk a portfolio might endure depends on a number of factors—your investing time horizon being just about the biggest one. There are other types of course, but these are some of the main examples of the risks we’re attuned to.
Volatility isn’t one of them. We don’t “mitigate” weather by hiding in a burrow forever; we don’t react to short-term swings by pulling out. As if we could spell it out any plainer, here’s our periodic reminder: we live with volatility in the pursuit of long-term gains.
Clients, when you want to talk risks, time horizons, and goals, email or call.
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