risk assessment

The Stability Tax: A Smoother Ride to Foregone Gains
photo shows a road with the sign BUMPS AHEAD

One school of thought about investing holds that ups and downs are the same as risk itself. A related belief: the role of a professional advisor is to minimize this volatility, to select investments and products and strategies that are more “stable” in the short term than traditional long-term investments, such as stocks. 

We have a different view, one that says the ups and downs are an integral, inseparable part of seeking long-term investment returns. In striving to grow long-term money over the long term, we work diligently to communicate the attitudes and strategies of effective investing. (It’s why you’ll hear us repeat ad nauseum, “It goes up and down.”) 

But don’t mistake us for pessimists. One of the attitudes of effective investing, we believe, is to embrace the idea that we get paid to endure volatility. Volatility is just the inevitable short-term wiggling, in our view. It’s not the same as risk if it’s just part of the ride. 

There are plenty of quizzes out there to “measure” one’s aversion to risk. Many produce a “risk number.” But one of the realities of investing is that risk and reward are related. So the higher a person’s “risk number,” the greater their potential returns. The lower the number, the less wiggling—and the stymied potential returns. There is a trade-off. 

We disagree with the notion that wiggling is a good measure of risk for long-term money, and it’s worth pointing out the consequences of this approach. Let’s do the math. 

Over an extended period, the foregone returns of a less-wiggly portfolio are, in effect, a stability tax. A lump sum invested for 25 or 30 years might only grow to half as much as a more effective portfolio that embraces that longer time horizon. 

For instance, imagine a person starting to invest for retirement at age 40: a monthly investment of $1,000 to reach their desired goals in an effective long-term portfolio would take $1,500 monthly in a less wiggly portfolio! All things being equal, less volatility would be nicer, maybe—but if this were you, would you take $500 every month from the rest of your budget to pay a stability tax?  

Put this way, the cost of avoiding some uncomfortable volatility is actually quite a burden! Half your future wealth? It’s a lot to pay to smooth some bumps now. 

Clients, that is why we work with you to determine if you can live with volatility on some fraction of your money. Instead of pandering to the fear of wiggling, it is more gratifying for us to strive to be effective long-term investors. We’re all about trying to grow the bucket, not giving you a smoother ride to a likely-poorer future. 

To be clear, this isn’t for everyone, and it is not suitable for short-term goals. But when you would like to talk more about avoiding the drag of stability on your long-term investing, please email us or call. 

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The Stability Tax: A Smoother Ride to Foregone Gains – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Growing Market Geniuses
photo shows two silvery arrows pointing opposite directions on a yellow background

Author F. Scott Fitzgerald wrote, “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” 

What if I told you—the best clients in the world—that you (yes, each and every one of you) have that first-rate intelligence? 

See, there’s something in our work together that tests this idea, just about on a daily basis. When you join us, you learn to live with the volatility in the market: it goes up and down, and we accept this as a feature of the ride. 

Very often, it goes down faster and deeper than it goes up. We may expect a 5% drop around three times a year: we might see a 10% drop around every two years. Meanwhile, gains of 10% are few(er) and far(ther) between: we’ve only seen it twice in the S&P 500 this century and only four times in the whole of the last century. And those gains have usually come shortly after one of the big drops. 

But we wouldn’t be in this business if, in the long run, the market went down more than it went up. 

So what gives? There are two seemingly opposing ideas about the market: 

  1. Drops go down faster, farther than gains go up.
  2. It goes up more than it goes down. 

Clients know the secret: the first idea is all about daily events, and the second idea is about the long haul. No guarantees, of course, but it is possible that these things can both be true. We just care less about the former. 

Therefore, if you consider yourself a member of the best client base in the world, then I consider you to be of first-rate intelligence. 

We’ve grown a community of geniuses here at 228 Main. Want to talk more about what this means for you? Write or call, anytime. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmapped and my not be invested into directly. 

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Play the audio version of this post below:

Growing Market Geniuses – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

A 100% Chance of Weather
photo shows a misty landscape, partly in light rain, partly in blue sky

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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A 100% Chance of Weather – 228Main.com Presents: The Best of Leibman Financial Services

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Where Risk-Mitigation Misses Its Mark
photo shows an arrow in the center of a bullseye

Did you catch any of the Olympics? With so many stunning performances, we’ve got competition on the brain. The human mind is a funny thing, though: sometimes we’re so keen on not losing, we don’t notice when we’re getting in the way of our own wins.

We don’t want to risk wasting our chance. It happens to people when it comes to investment decisions, too. The Financial Times recently put it this way:

“Think of your life like an archer releasing just one single arrow at a target. Naturally, you want to make your one shot at life a good one—to hit your bullseye—and this is why you mitigate your risks: to improve your precision (or the tightness of the grouping of your potential arrows) as well as your accuracy (or the closeness of that potential grouping to your bullseye).”

Let’s break that down. We very much want to hit that bullseye, so we will do what we can to get rid of the wild shots: through practice and experience, we realize they are the most painful and obvious problems, right?

The Times continues, however, that we often end up “improving precision (removing our bad potential arrows) at the expense of accuracy.” When we control for a more limited, consistent potential performance, we may be sacrificing our proximity to the target.

The price of so-called safety is often hidden and certainly too high. Mitigation tools can omit “the great shots that could have been” for the sake of reducing “the bad shots.”

To a degree, it’s understandable: the bad shots can be so noticeable, of course reasonable people want to avoid them! Those missed shots, on the other hand, will never be as obvious, so who’s to say they hurt that much?

But long-term investors do know the costs. A few opportunities here and there, over a long stretch, can add up.

And we want to help you work what you’ve got.

Clients, need to talk about the shots we’re taking? Write or call, anytime.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.

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Play the audio version of this post below:

Where Risk Mitigation Misses Its Mark – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Your Safety Net Is Not a Hammock
photo shows a safety net in midair

The advancement of technology has helped humans perform more tasks more safely.

Backup cameras and drift warning systems help curb preventable accidents in our vehicles. Even in our pastimes, technology can monitor more risks and dangers than ever. Big-wave surfers take on, well, bigger waves, prepared with more data about the conditions than ever before… not to mention a jet-ski nearby, ready to help anyone who crashes.

Such monitoring technology may allow us to take on more risk, but this doesn’t mean we ought to. Specifically, this tech becomes dangerous when we let it take over and do our thinking for us too.

Some providers offer tech tools to help “measure” risk tolerance. The tools are, in theory, designed to increase transparency. If we know more about the dangers present, shouldn’t we be able to make better decisions?

For some investors and clients, it’s perfectly comfortable to use such scores to determine the “appropriate” investments. The trouble is that then the tech tool is doing the interpreting, moving from observation to decision.

That middle part—the thinking, the choosing, the deliberation—that’s where we like to focus our energy in this shop.

Many tools may seem like safety nets, keeping us from ever falling too hard, but they should not replace the process.

You may remember The Flying Wallendas, a family that for generations has performed high-wire stunts (one of them crossed the Grand Canyon on live television a few years ago). The family avoids nets when they can.

Why?

The net may make you feel better about the risks involved, but it’s counterproductive—and dangerous—if it leads you to behave with less awareness, intention, and energy.

You must behave as if the risks are always present… And carry on, making the best decisions possible.

Clients, wondering about nets, risk, and more? Let’s chat: call or write anytime.

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Play the audio version of this post below:

Your Safety Net Is Not a Hammock – 228Main.com Presents: The Best of Leibman Financial Services

This text is available about https://www.228Main.com/.

Where Did All The Risks Go?

© Can Stock Photo / Hmelevskih

In what seems like the good old days, we thought about many kinds of risk. Now, to many, risk only means one thing. All the other kinds of risk seem to have disappeared. Here are some of the classic risks as we learned them long ago, and still understand today:

Market Risk. Changes in equity prices or interest rates or currency exchange rates that hurt the investment value.

Liquidity Risk. Being unable to sell an investment without a discount for lack of buyers.

Concentration Risk. Having all your eggs in one basket, when the basket gets upset.

Credit Risk. A bond issuer might not be able to pay you back because of adverse conditions.

Inflation Risk. A loss of purchasing power over time because investments fail to keep up with a rising cost of living.

This old-fashioned approach to risk focused on possibilities for what might happen in the future. This makes sense to us, since the future is where we will get all of our coming investment results, good and bad. The past is past.

But perhaps the most popular approach to risk today is based totally on the past, not the future. Past volatility is supposedly the measure of risk in any investment and every portfolio. Modern Portfolio Theory (MPT) implicitly assumes that past volatility is the sole measure of risk. Yet volatility is inherent in any form of long-term investing, and has little to do with many of the classic forms of risk.

Investment firms and advisors promoting ‘risk analytics’ and many measures of ‘risk tolerance’ are using this backward-looking theory of risk. It has nothing to do with the classic definitions of risk, outlined above. In our opinion, some of the latest and greatest risk management technology is not focused on actual risk at all, and could discourage people from enduring the volatility required to achieve long term results.

Meanwhile, the classic understanding of risk has us thinking about its many dimensions as we choose securities and build portfolios. One drawback of our approach? It takes more work to do things the old-fashioned way. But we think it is the right way to go. No guarantees, of course.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.