How Should an Investor Define Risk?

For me, the ability to fast forward (or bypass completely) all forms of television commercials thanks to the DVR function is a big time saver.

I’m also able to avoid the endless commercial narrative provided by financial services companies that would have me believe that “retirement” featured nothing but non-stop golf and tennis, cocktails at sunset, traveling the world, and fulfilling relationships.

Faced with what is an average three-decade time span for a healthy couple in their early 60’s, all of us would beg, borrow, and steal to get to that age as quickly as possible for our well-deserved “retirement reward.” If that’s how it really went….

Alas, retirement is not easy nor does it make all of your problems go away. And accepting the inherent volatility associated with investing must come with the territory.

On the first trading day of the new year 2022, the S&P 500 index of U.S. stocks closed at roughly 4,800.

At varying points during the month of March, this same index had fallen about 14% from the beginning of this year.

To an investor who owned this index, this market “correction” might prompt feelings of worry and concern. The volatility in the value of your hard-earned investment dollars might lead you to believe that you have suffered a 14% loss during this period.

But volatility in the financial markets is nothing new. Over the last 40+ years, the average intra-year decline of the S&P 500 stock market index has been amazingly close to our 1st quarter ’22 experience – about 14%.

Do your notions of “risky” and “safe” still describe the financial world as it really is?

I wish I had a dollar for every time I’ve heard a retiree say to me, “I can’t afford to take risk by investing in the stock market.” My rhetorical reply to that kind of comment would typically be “How much time do you have?” to which we all know the answer is “No idea.”

Since we don’t know how long our retirement will last, or put another way in financial terms, how long do we need our hard-earned accumulated assets to last, conservative financial planning calls for taking a longer-term view of what on average tends to be a three decade, two person retirement duration.

A follow up question is “How would you define investment risk?” Generally, we all agree that ”risk” associated with investing means the permanent loss of money. Or with the recent run up in inflation, how about the permanent loss of purchasing power?

Investing in the stock market does bring risk – but is that risk any worse than investing in a 10-year U.S. Treasury bond yielding 2.2% today, which guarantees a loss of both money and purchasing power when taking inflation and taxes into account? Back in the early 90’s, this was considered a “safe” asset – but today it clearly is not.

What we tend to lose in the flurry of media and “expert” advice on investing, is that “risky” and “safe” are a matter of semantics – and just like how we use language, there is a personal meaning that we assign on an individual basis.

These concepts can sometimes require revisiting; most often in times when the market swings. If this is something you’d like to discuss, contact us to set up a time to speak.


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