April 30

Coffee With Mike- A Little Bit About Risk

Investments, Risk


Let's talk a little bit about risk. When we invest our money, what's the risk we're taking? Well, from a financial planning point of view, we've got lots of risks that are involved. There's always the risk of the fact that we can put our money in something and not get it back out. So, there's the risk principle: there is the risk that the market is not going to behave in a way that we think it's going to behave, and so there's market risk. There are times where interest rates change and so there's credit risk. There are creditor risks if we're loaning our money in bonds to other people. 

So there are a lot of different risks when we think about it from a financial planning point of view, when we look at from a technical point of view, maybe it's what I should say. But when we look at from a personal point of view, what are the risks? 

Well the risk is:

  • That you're going to stress out; 
  • That you're going to panic; 
  • That you're not going to take it seriously enough;
  • That you're going to take it too seriously; 
  • That you're going to overextend the investment account's ability to rebound from a withdrawal that's just too big for that moment.

So there are risks there that we want to pay attention to. Some of these that we can really do nothing about except understand them, and others that we can do something about because really it has to do with how we perceive them. 

So when someone calls me up and says, "I'd like to know whether you would suggest that I adjust my portfolio, if I change my portfolio to something different?" I take a step back for a moment because it's really easy to say, "Well I think the market is going to do this, or I see the market doing that, and therefore you want to move your investments here or you should move from there. That's really I think a bit arrogant if I would respond that way. No one, again, no one knows what the future is. 

"How do you feel about the risks you're taking to accomplish your goals, in terms of how you see them from your own perspective, and how they make you feel?"

Instead, what we really want to think about is: 

  1. What are your goals? 
  2. What risks are you taking in having those goals accomplished? 

How do you feel about the risks you're taking to accomplish your goals, in terms of how you see them from your own perspective, and how they make you feel? What are the risks we're taking in terms of what we're planning to do, and the money we need to do it, and the time frame between now and then? Is it long enough? Is it really the best timing, best intersection of timing in terms of needing the money, planning the trip, investing the money, and then withdrawing that money that money? Is that really a good a good intersection of all those different concerns?

So what we're what we're actually trying to do then, when we say should you adjust your portfolio is we're looking at it from a lot of different sides. It's almost like looking at a prism. We're trying to see through each one of those prisms, because what we're seeing through each part of it is valid. There's nothing that's invalid about how we're seeing it, so we have to pay attention and respect what we're seeing from every angle, and then be able to make a response that is appropriate, that's wise in terms of what you want to accomplish, and how you want to accomplish it, and when you want to accomplish it. 

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