My job as financial advisors is to help people recognize and then achieve their goals. Many people don’t realize that it rarely pays off to take on more risk than necessary to do so. In fact, it could result in failing to meet those goals at all.
How Do You Measure Risk?
A popular view is that you can measure risk by how much the markets rise and fall over time, or volatility. It’s true that volatile investments are seen as risky because they have a chance of large declines. But the measure of goal failure is really dependent on the magnitude of the loss and the timing.
Breaking Even
Imagine an investor who has $1 million in the market and
What’s most important is the percent required to break-even after a loss. As the loss increases, the return required to make up for it also increases.
Is Time On Your Side?
Markets may generally rise over long time frames, but they spend a lot of time making up for previous losses. As can you can see in the chart below.
Real Investment Advice, 11/28/2016, The Long-Term Investing Myth, Lance Roberts
A sizable loss can be particularly devastating for those near, or in, retirement. Especially if they are already withdrawing from their portfolio for income. That’s because there usually isn’t enough time to make up for what was lost.
Even young investors who have decades before retirement need to be mindful of big losses. A negative return will negate compounding interest. This makes investing unnecessarily inefficient during the time required to recover from a large loss.
The bottom line is that not losing money is a powerful wealth building and preservation tool, no matter what age an investor is.