The Risk of Not Taking Risk
Over the years, I have developed a network of other fiduciary financial planners. From time to time, I invite one of these individuals to contribute an article of interest. Today, Michael J. Garry, CFP, JD/MBA and owner of Yardley Wealth shares his thoughts about “The Risk of Not Taking Risk” Michael is a CFP, attorney, and financial advisor in Newtown, PA.
As a financial advisor it is my fiduciary responsibility to occasionally ask my clients to step outside of their comfort zones in order to secure their financial future and achieve their goals. When it comes to the long term success of your money, thinking you are avoiding all risk inhibits your ability to reach your goals – which is the biggest risk of all.
Understanding Risk
Many risk-averse investors associate investing in any amount of stocks as too risky. In reality, avoiding putting money into stocks can be incredibly risky in terms of reaching your goals.
Although bonds may seem like an attractive investing option due to their low-risk nature, investors must realize that taking on less risk reduces the opportunity for portfolio growth and thus, may not adequately prepare you for retirement. Often investors trade the actual security of their retirement for the perceived security of investing in lower-risk options. It’s ok to have some bonds, I’m saying that all bonds is not the right way to go for most investors.
A key element in understanding the risk associated with certain investments is the idea that the market has done most of the worrying for you. Markets are highly competitive, which means that new information – including risk, is quickly built into the prices of assets. Rather than question the efficiency of the market, investors must work with it in order to access potential rewards.
People who are intimidated by risk may allow this fear to get in the way of the success of their portfolio. Commonly, investors will gamble on individual stocks, rely on forecasts or historical returns, and therefore, accumulate unnecessary costs and tax liabilities. We don’t recommend those.
Managing risk by setting goals
Setting goals aids you in defining key risks and the process of managing these risks. For example, a primary goal of retirement planning is to provide for spending in retirement using the money that you have accumulated during your career.
A key risk in this situation is uncertainty how much income can be sustained or how much money can be spent without earning more. Managing this uncertainty requires investors to look at their investment performance as the unit of measurement by which this uncertainty is either increased or reduced. So, as advisors, the way we monitor the investment performance is by adjusting the risk to reduce the uncertainty of achieving sustainable consumption.
We take risks everyday
A key aspect of understanding risk is realizing the fact that regardless of aversion to risk everyone takes risk on a daily basis. Whether it be as simple as crossing the street or driving a car, these activities are associated with some degree of risk. Yet, we take these risks due to the fact that the alternative would make it impossible to go about our daily lives. Similar ideas can be applied to the idea of reaching financial goals – if it would be impossible to fund your goals without taking on a certain degree of risk then logically we must assume this risk in order to meet the objective.
What is the process of making these decisions? We evaluate alternatives, consider potential consequences, balance our emotions with our intellect and analyze the short term and the long term impacts of our choices. Often, outside advice can help provide us with an objective assessment of the potential risks and aid us in considering things we might not have noticed on our own. That’s where we come in.
Michael J. Garry, CFP(R), JD/MBA, owner of Yardley Wealth Management, LLC, is an independent Financial Advisor who provides Fee-Only financial planning services and investment management in Newtown, PA, and the author of Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner
