Being RiskSmart

You can’t get away from the fact that all investing involves a degree of risk. The value of your investments can go down as well as up and you may get less back than you invested. In some cases, you could even lose your entire stake.

Risk is often confused with volatility, but they are in fact two different things. Equities in particular are subject to periods of volatility which can be very extreme. High volatility might keep you awake at night but it shouldn’t be mistaken for risk. An example of a major risk is not having enough money to last your lifespan, or to fund a specific goal.
A common type of investment risk is concentration risk — the risk that your portfolio is too concentrated. There’s also credit risk — the danger that a corporation, or even a government, will default on a bond. Then there’s liquidity risk — the possibility that you aren’t able to realize cash from your investment when you need to; this can be a real concern for those who invest directly in property.

A risk that many investors fail to pay sufficient attention to is inflation risk, or the extent to which inflation will erode the real value of your investments and, hence, your future spending power. So, for instance, not investing enough is a risk — and so is having an investment strategy that is too cautious. Yes, that’s right, not taking enough risk is itself a risk.

Some risks are more avoidable than others. For example, you can avoid concentration risk by having a diversified portfolio. But one type of risk that you can’t diversify away is market risk, also called “systematic risk”.

Market risk is the possibility that you’ll experience losses as a result of factors that affect the overall performance of the financial markets. Examples would be a major natural disaster, a terrorist attack or an unexpected rise in interest rates. Economic recessions can have a very detrimental effect on share prices.

There is, however, a flip side to market risk that is much more positive. In general, markets reward investors for the risk they take. The more risk you take, the greater the potential reward you can expect in the long term. Remember, taking more risk doesn’t guarantee higher returns; that’s the nature of risk. But if you stay invested and are able to resist the temptation to dip in and out of the market, you should eventually be rewarded for the additional risk you take.

That said, you must not underestimate how hard it is to stay invested when the markets take fright. Every few years investors should expect equity markets, for instance, to fall 20, 30, 40%, or even more. Falls like the ones we’ve seen recently can test the resolve of even the calmest investor, and the more risk you’ve taken the more you will have at stake.

In those circumstances, many investors capitulate, effectively locking in losses and sabotaging their own returns. Capitulation risk is one of the biggest risks of all.

That’s why it’s so important for investors to think very carefully about their need, their willingness and their structural and behavioral ability to take risk from the outset. In many cases they will need to compromise. For example, you may feel that you’re fairly comfortable with the idea of taking a risk with your savings; but if, say, you’re due to retire within ten years, or if you’re worried about losing your job, you may have to be more cautious than you otherwise would.

Working out the level of risk that’s appropriate for you is a crucial role of an investment adviser. A good adviser whom you know and trust will also help you to stay the course when you’re tempted to capitulate. Intelligent tools and technology can and should be used to do this heavy lifting.

One final word of caution about the connection between risk and reward. Don’t forget, you can only expect reward in return for taking risk. Because we’re human, we sometimes like to fool ourselves that we can have the best of both worlds; in other words, higher returns and less risk. The investing industry knows this and will often make out that if only we buy this or that product, we can indeed have both. But don’t be fooled. The way to offset your risk is through diversification, and holding safer asset classes such as cash and bonds alongside riskier equities.

To quote the investment author William Bernstein, “The best way to spot investment fraud is the promise of safety and very high returns. If someone offers you this, turn 180 degrees and do not walk – run.”

You have been warned.

Was Warren Buffett's success predictable?

Being RiskSmart

WealthFactor Review & Update: March 2021

Behavior: Fear

Investing Essentials: The Different Asset Classes

Interview: How much is enough?

We're not as good at investing as we think we are...

WealthFactor Review & Update: February 2021

Rethinking the value of wealth services

You'd Be Amazed at How Superstitious Investors Are

Interview: Risk Capacity

WealthFactor Review & Update: January 2021

What is evidence-based investing?

WealthFactor Review & Update: December 2020

"Don't just do something. Stand there!"

Interview: Does the financial media help or hurt?

Digital Wealth Management - Launch Announcement

Letting fear lead investment decisions can be costly

WealthFactor Review & Update: November 2020

Not all Advisors are Equal

Successful Investing Is Dull

Complexity Adds to Cost and Risk

WealthFactor October 2020 Review

Reducing market volatility through diversification

Taking a RiskSmart efficiency centric approach to investing.

It’s important to keep the link between wealth and happiness in mind.

September 2020 Review Replay

Preparing for your work-optional stage isn't just financial

August 2020 Review Replay

Webinar Replay: Introduction to Direct Indexing

Using Options for Income

Behavioral Investing Mistakes: Chasing Trends

July 2020 Review Replay

Emotional Investing Mistakes: Attention Span

Retail Investor Rises Again

Emotional Investing Mistakes: Regret

Perspective on Recessions

June 2020 Review Replay

Be Ready for Declines

There is always a reason not to invest

RiskSmart Webinar Replay

Don't work with professionals in the mirage building business.

Your Financial Advisor Has Too Many Clients

May 2020 Review Replay

Be Skeptical of the Investment Media

Beware of Overconfidence Bias

11 Ways Wall Street Gets Paid

Webinar Replay: An Introduction to Direct Indexing

What’s your number?

Refocus: What’s Wall Street Selling Today?

Do You Have a Plan for Getting Punched in the Face?

Financial Planning Matters. But...

WealthFactor April 2020 Review

Refocus 5-8-2020

2020 Berkshire Shareholder Meeting Key Takeaways

Why High Fees Hurt So Much

Refocus 5-1-2020

Introduction to Direct Indexing

Webinar: A Guide to RiskSmart Investing

Refocus 4-24-2020

Overview: PortfolioSmart

Overview: TaxSmart

Overview: FeeSmart

Overview: RiskSmart Investing

Webinar: The Critical Importance of an Investment Plan

Maximizing Opportunity with an Investment Plan - Part 3

The Critical Importance of having an Investment Plan Part #2:

Its time to turn off CNBC and create a plan.

1st Quarter 2020 Review Webinar Review

Why are you paying more and increasing your risk?

High Fees Are Hurting Your Investment Portfolio More Than the Coronavirus.

Pandemic Investing in 3 Parts: How to Navigate the Current Situation.

Four Behaviors Successful Investors Avoid

Are One of the Investors Who Underperform Passive Investing

Do You Invest With Your Emotions?

How should you invest?

Are You Paying Too Much For Investment Advice?

Have Questions? Do You Like Coffee?

Should You Use Funds or Stocks In Your Portfolio?

Commentary: Passive Investing Trends

Review & React: Goldman Sachs Fee Schedule!

Coffee Talk - Open Investment Q & A

Review & React: A Morgan Stanley Investment Proposal

RiskSmart Investing: Portfolio Efficiency

2019 Market and Investor Insights

RiskSmart Investing with WealthFactor

RiskSmart Investing with WealthFactor

Thank you to the Lake Oswego Review

New Addition to the WealthFactor Team

Quarterly Investor Insights

Sample - How To Post

Welcome to WealthFactor

Fed Intervenes in Banking Rate

Now You Can Blog from Everywhere!

Does your investment professional have history?

1st Quarter 2019 Insights

Keys To Investing Success

Tax-Smart Investors Avoid Mutual Funds

2018 Year-End Market Insights

Avoid Premium Prices for Commodity Services

2018 Mid-Year Market Insights

Ask your Adviser for a Discount

Index Investing Enhanced