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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