When making personal investments there is stigma that taking “risk” is a bad thing. We constantly hear that we need to reduce our risk, pare back the risk and diversify away as much risk as possible. By doing this we are expected to receive better outcomes.
But in reality that is not the case. The stock market rewards those who are willing to take risk. It does not guarantee those rewards in any specific amount of time… but OVER time, those who take the most risk generally receive the biggest rewards.
For example: the investors that had the strength to invest in 2008 or 2009 have experienced the most gains over the last decade. And rightfully so because at that time we all thought the world was ending. So the biggest risk was to put more money into the market and a few years later the rewards arrived…
However, this is not a post about how we all need to take more risk to achieve better returns.
Instead it’s about the other side of the story…the side that talks about understanding our investments better so we know how much risk we are actually taking!
We all use the word “risk” but what is risk really, in the investment world. To me it is a measure of volatility. Yes, how much can your portfolio potentially MOVE around. That is risk. When your portfolio moves way more than you were expecting, you suddenly feel that you are taking a lot of risk. At that point, risk becomes very bad because you will most likely do something.. Take some action. That action will probably be bad for your financial future. (Sell low and buy high)
So in general risk is not bad at all. Volatility is not bad. Take as much risk as you want. If you know that going in, and if things go off the rails you are not surprised to see your portfolio move.
But more importantly do the research to understand the risk you are taking.
Looking backwards we can see that:
- bonds are less volatile than stocks.
- small cap stocks are more volatile than large cap stocks
- mid cap stocks are less volatile than emerging market stocks.
- etc. etc. etc.
An easy way to see how volatile your portfolio is to pull out your October statement- the month that just passed. It was a month like haven’t seen in a very long time (feb 2018 similar, but then you have to go back years) The S&P 500 fell 9.9% in 1 month!
What did your portfolio do?
How do you feel?
Do you want to take on more risk or reduce it?
Neither answers are wrong but you have to accept the decision.
Flip-flopping in good times and bad times is another bad move. Things can turn on a dime in the markets and you will always be a step behind.
My advice to you is to evaluate your portfolio going into 2019. Use October as a guide to learn how much risk you are taking.
Remember that those who take more risk typically get rewarded in the future but you have to endure the volatility to get there.
I’d be happy to help you understand your portfolio better. Don’t hesitate to reach out.
-Jared S. Friedman
