Risk: It’s not bad, but you do need to understand it
Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. Jeff has earned the Life and Health Insurance Licensure and has passed the Series 65 examination. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
RISK: IT’S NOT BAD, BUT YOU DO NEED TO UNDERSTAND IT
Risk is one of those things, that often times, you don’t realize how much (or little) you were taking until after the fact. Once enough experience is gained, then you can apply a different perspective of measuring the risk before something happens to determine if you should proceed or not. With a better understanding of the type/amount of risk you are taking, there is also a smaller chance of being “surprised” by the outcome.
More often than not, in the world of investing, the sole focus is all on the return, which is quite misplaced. Not to downplay that the sole reason of investing is to generate a return, but without any understanding of the amount of risk being taken that approach is nothing more than a ticking time bomb. I’ll elaborate.
I am sure you have heard the expression “more risk, more reward.” While I wouldn’t say that expression is wrong, but rather incomplete. Just because one took more risk does not with absolute certainty guarantee more return. That’s the nature of risk, by taking it, you are putting your assets in a scenario of potentially losing. Because of just that, that’s why you are rewarded with a return. The more you take, sure, you expect a more handsome return (which is not achieved without greater loss exposure).
We as people have a tendency to hear what we want to hear. I would argue that in some cases, the internal thoughts when it comes to investing risk, is “sure I can handle that,” all the while only looking at the upside, without the consideration of “what impact will this have on me” should things actually go the other way, and here is where some very tough and expensive lessons are learned. Particularly when we look at the last 10+ years in the market, it has been the largest bull market in history. That is a long time to essentially get accustomed to the idea that the market only goes up, and when it doesn’t, it’s a short period with a quick recovery. This isn’t always the case folks.
A point worth making that aside from potentially being “surprised” by an outcome, is the true impact it has. If an individual loses more than what he/she thought or understood they could. This tends to result in an emotionally fueled reaction that generally leads to selling when the investment is down (locking in a loss), and ultimately deviating from the investment plan. There lies the issue: unknown risk, reaction (opposed to being proactive), inability to maintain an investment plan, and locking in losses. This outcome can vary from “wow, I never want to do that again,” all the way to a significant change in lifestyle, both of which are generally not sought-after experiences.
We do live in a world void of guarantees, but with experience and focus being applied to the the right component (risk, not return), you do have a much better chance of being able to maintain your investment plan and stay the course. The idea simply put: you want to know how deep of a swimming pool you are jumping into before your toes start reaching for the bottom in a panic. Just because you chose to jump in the deep end, does not automatically mean you will be swimming splits like Phelps, without the potential of drowning, and that little part should not be overlooked.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.