When it comes to investing, risk comes in many forms, and it can apply to many different types of investments. But there’s one type of risk that has been universally known since man began making investments – the risk of losing money! And as far as tolerance goes, If I’m tolerant of something, that means I can be patient with it, or endure it. So isn’t the question “What is your Risk Tolerance?” really just another way of saying “Are you okay with losing money”? Um, no, I’m actually not, thank you very much.
Of course, the question isn’t as straightforward as that. In the area of investments, where each day the risk of falling prices is clear and present, investors must believe that temporarily enduring lower values will ultimately result in receiving higher returns. And how much one believes in the lasting positive relationship between risk and return will ultimately determine their risk tolerance. And regardless of the means used to help attain a person’s risk tolerance – questionnaires, what-if scenario’s, or a review of a person’s financial condition, it is not a simple question to answer. The personal views toward risk can produce feelings and attitudes about risk that may differ from the numerical-driven results. There can easily be a disconnect between emotional and data-driven risk tolerance which would impact the risk-return relationship, and it’s the risk-return connection that determines long-term investment performance.
Believing in the positive results of long-term disciplined investing through low-cost investment vehicles is difficult when we are immersed in a financial environment that encourages short-term transaction-oriented investing, or in other words, speculating. Investment decisions based on the prospect of being right 50% of the time with short-term, speculative bets will weaken one’s belief in the core investment principle of risk and return.
¹ Data provided by Standard & Poor’s Index Services Group. The S&P 500 is not available for direct investment. The performance listed does not reflect the expenses associated with the management of an actual portfolio.
So far this year the markets have shown greater volatility (the Dow lost over 700 points today), and I would imagine further declines may prompt many more investors to “get out” of the market or decide to never to get in - which the evidence demonstrates is hardly ever a good financial decision in the long-term. And the likely reason these investors will abandon their risk exposure is they don’t want to lose money! But perhaps they may fare better in the long-run if they acquire a better understanding of the benefits of long-term investing, and more importantly, a better understanding of their personal risk tolerance.
Carr Wealth Management’s process involves identifying a client’s objectives, finding out where they are now, and then helping to construct the most cost and tax-efficient strategies to reach their goals. The firm’s mission is to help educate its clients on how to take advantage of the market, instead of letting the markets take advantage of them. Please contact us to set up a no-charge initial consultation.
Past performance is no guarantee of future vale