THE IDEA OF TAKING RISK IS UNIQUE TO US ALL
Risk means different things to different people. Many times, risk implies permanent loss. Labeling a portfolio or investment as “risky” doesn’t really help us define how that investment will perform over the long term, or whether that investment belongs in the portfolio in the first place. When talking very broadly about stocks (equities) or bonds (fixed income), labeling these asset classes as risky doesn’t help much at all. A better way to define these two categories is using a measure of volatility. It is true that equities are more volatile than fixed income. Stocks fluctuate more than bonds on a daily basis and for many investors, looking at the daily volatility of their portfolio will drive them crazy! Volatility isn’t necessarily a bad thing—it is finding the right mix of stocks and bonds in a portfolio so you aren’t making major changes over normal market fluctuations. Over time, investors are rewarded for taking on more volatility, as stocks outperform bonds in the long run.
THE HOLISTIC PLANNING APPROACH TO INVESTING
It is very difficult to measure a degree of risk. One of the only things we can control in investing is how we manage risk. One of the best ways to manage risk is to have a comprehensive plan in place. Parts of this plan may include defining a retirement age, savings rates until retirement, income needs during retirement, and annual goals along the way. Ultimately we need to understand what it is we can control, and what it is we cannot. We can control which investments we choose to include in a well-diversified portfolio. We can control our savings rates and at what age we choose to retire. We can control how much we want to spend per month in retirement. The more time investors have to think about all of these things, the more in control they will feel. Risk and time go seemingly hand in hand. The less time one has to prepare, the riskier things will feel.
ADVICE AS A COMMODITY
A skilled financial advisor will have a lot of experience in constructing portfolios, cash flow planning and can help assess the unique needs and goals of individuals and their families. They understand the concept of risk and return and should help their clients manage the many emotional aspects of investing. Having a knowledgeable guide by your side will help you stay focused on what matters most to you and your family.
THE BENEFIT OF ASSUMING A LITTLE BIT OF RISK
It would be impossible to live our day to day lives without taking some risks regularly. Imagine trying to advance in your career, caring and providing for your family, enjoying your well-earned leisure time and supporting your community if any possible risk was deemed too potentially hazardous to navigate. We would be unable to function under such a mindset. Rewards are only possible if some degree of risk is taken. Figuring out which risks are worth taking and which should be avoided is the hard part!