The Risk of Not Taking Risk
When it comes to the long term success of your investments, not taking enough risk might be the biggest risk of all.
As financial advisors, it is our fiduciary duty to ensure that the investment plans we create are aligned with the goals of our clients. Sometimes, this means asking our risk-averse clients to step outside of their comfort zone in order to achieve their goals.
Many self-declared risk-averse investors believe that putting their money into stocks is too risky. However, not investing some of your portfolio in stocks is pretty risky too. The rate of return on bonds and other low-risk investments may not financially prepare people for their retirement because the growth of their portfolio may not outpace inflation. Then what happens? Investors trade the actual security of their retirement for the perceived security of investing in lower-risk options.
Many people who fear taking risk do just that when they invest without the help of an advisor. They gamble on individual stocks, they rely on forecasts, they chase past returns, the do not rebalance their portfolios to take account of changing risks, and they run up unnecessary costs and tax liabilities.
We take risks everyday
Even the most risk-averse people take risks on a daily basis. Crossing the street, driving a car, exercising. All of these activities have some degree of risk. But, we take them, since the alternative would make it impossible to go about our day-to-day lives.
Then there are the big decisions like choosing which college to go to, choosing your career, purchasing a home, getting married, and having children. These decisions all involve a tremendous amount of risk and yet, most of us make them during the course of our lifetime.
How do we go about making these decisions? We weigh the alternatives, consider consequences, balance our emotions with our intellect and look at the short term and the long term effects of our choices. Sometimes, we ask advice from others to help guide us. This outside advice can help provide us with an objective assessment of the potential risks and help us see things we might not have noticed or considered on our own.
The Value of Advice
In investment, this is the value a good financial advisor can bring—not only in understanding risk and return and how to structure a portfolio, but in knowing the specific needs, circumstances, and aspirations of their clients.
It would be great if we could watch our investments soar without assuming any risk. But the reality is that risk and return are directly related. An investor’s chances of a good outcome are far greater when they use the resource of an informed advisor to guide them through the ups and downs, help them step outside their comfort zone when necessary to foster the confidence needed in being a successful long term investor. Risk and return are related. But not all risks are worth taking. The process of working this out starts with not trying to do it all alone.