By: Edward J. Leach, CFP®, MBA
Risk is one of the most common and overused words when discussing investments. Every questionnaire or exercise you go through to evaluate how you should be invested is centered around the word risk. There is even a fintech company in our industry called “Riskalyze,” which is centered around a risk questionnaire and a risk score.
A Google Search defines risk and cost as follows:
Risk (verb) – “Expose (someone or something valued) to danger, harm or loss.”
Cost (noun) – “The effort, loss, or sacrifice necessary to achieve something.”
Your portfolio should not be dictated by a score spit out of a risk questionnaire, or in other words, a “danger questionnaire” or “harm questionnaire.” Just think, how would you feel if we told you your recommended investment portfolio is based on your Danger Score of 75. You would probably run out of the door!
Don’t get me wrong, understanding how much risk you should take is very important to your planning, but what is often not clearly explained or overlooked is the WHY. Why should you put your hard-earned resources in harm’s way or danger of loss?
If you want to achieve your long-term goals and have enough resources to last you a lifetime and maybe even leave a legacy, you need to be comfortable putting your assets in harm’s way. So, get comfortable with being uncomfortable.
Being uncomfortable is the “Cost” of being a successful long-term investor. Sacrificing some comfort in exchange for the opportunity of achieving higher returns will likely reward you over the long term.
Look at this example in the chart below of the growth of $1 invested in a Global Stock Index from 1970 through 2020. If you started in 1970 as an investor – you did not make money until about 1975. However, if you decided the “cost” was too high and bailed, you missed out on a 20 plus year bull market. If you stayed the course and accepted being uncomfortable during all the events listed on the timeline, your $1 would have grown to $80.
Keep this perspective, being uncomfortable is the cost of being able to achieve your long-term goals.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their business while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA which is dedicated to serving fee only advisors.