Risk: Our Friend
Submitted by Wisdom Index, LLC on August 28th, 2015“Risk is your friend, not your enemy.”
I raced out of the office Friday afternoon to watch my son, Luke’s 8th grade football scrimmage. I was feeling worried that I might miss some of his game, while also reeling a bit after just witnessing the DOW close down 530 points.
I arrived a few minutes late, but just in time to see him get to run a halfback pitch to the left. He ran a few yards, turned up field to gain a few more, and then was hit hard by their free safety #20.
While Luke’s team did technically “lose” the scrimmage, they played very well and went home satisfied knowing they had played a better team and played them tough. After Luke showed me all of his bruises and scrapes, he went to bed sore, but also proud. I went to bed thinking about how the risks he is taking playing this game are helping him grow into a stronger young man.
Investing tells a similar story about how taking risks can help things grow. Investing can be scary as there are real risks involved. Markets will get hit and sometimes hit hard. Portfolios will be skinned, scraped and sometimes bruised.
It is imperative that the investor understands that these real risks are actually required for there to be the possibility of future expected returns.
At Financial Innovations, we believe that market risk is not an adversary to beat, dodge or avoid, but an ally to partner with. Simply put, market volatility is your friend, not your enemy.
If you watch the news this weekend, you will likely see pictures of traders in agony or graphics showing the biggest one week decline since 2011. They would like you to believe that last week’s market decline is the investor’s enemy.
What they won’t show you is that a globally diversified, low-cost portfolio, like one represented by DFA’s Global 60/40 Allocation[1] is actually down about 2% for the year. It’s nothing to cheer about, but nothing to ruin a weekend over either.
While I am not sure if the market declines will continue next week, or in the coming months, I am grateful that it remains a possibility. Without this ongoing risk, there would be no expectation of future returns.
I do know that because of our planning and investment process, your portfolio is well positioned for future growth and market risk.
