What Is Risk?

Risk. It means different things to different people. Most people associate risk with capital risk. Or risk in the stock market. This is the greatest fear of most investors. The risk of their investments going down. What these investors don’t realize it that this risk is short term ‘noise’. This volatility is why we earn a superior return over the long term.

An assortment of United States coins, includin...
An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

From 1927 to 2013 the S&P 500 index earned 10.06%. During this time there has been down turns of 10% or more 87 times. And down turns of 20% or more 23 times. The average recovery period from 1946 has been 111 days. The lesson here is that in order to earn a good return you need to experience ‘bad’ times. And these bad times have been historically short term.

During the ‘bad’ times in the equity markets it seems like it will never end. It will end. One of the worst decisions an investor can make is to sell in a down turn. Because historically the recoveries have been fast and furious. Of course, past performance is no guarantee of future results.

No one can really tell us what would happen if the equity markets would go down and stay down.

  • Would companies go bankrupt?
  • Would insurance companies go bankrupt?
  • Would banks go bankrupt?
  • And which ones would go bankrupt?

I have to believe that this will not happen. I believe that the equity markets will experience another crash, however I have no idea when this will happen. And no one can tell you when this will happen. No one can tell you whether the next 20% move will be up or down but the next 100% move will be up.

The Wall Street bullies will continue to use fear to entice you to move your money. This is how the bullies make money, when you move your money.

Remember there are other kinds of risk.

There is inflation risk which is hidden and relentless. The purchasing power of your money is decreasing every year. Or at least most years. Inflation risk is your most dangerous risk during your retirement. Think about the things you bought just 10 years ago and what you pay today for the same product…cars….food….gas…heating fuel…etc…etc. The equity markets are a good tool to help you maintain the purchasing power of your money. As well as build additional wealth, over the long term.

Another risk is liquidity risk. Liquidity risk is the risk of the investor’s inability to meet essential outlays. For anyone that needs access to their money, like during retirement, should have the appropriate allocation in high quality short term fixed income.

Each of us has different goals and different time horizons. These need to be taken into consideration when designing a plan.

Your careful and knowledgeable choice of time horizon, risk tolerance, investment objectives, and decisions on withdrawal needs coupled with your investor coach/fiduciary adviser’s professional expertise gives you access to Nobel Prize winning methods of reducing risks associated with investing.

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