“Risk” Is Not What You Think
“Risk” does not measure how likely you are to lose all your money.
Instead, “Risk” is a measure of market volatility, that is, how much the current price of a stock differs from it’s mean value. Risk is measured using the concept of the Standard Deviation. The Standard Deviation is a measure of the the level of volatility of returns on an annual basis. In other words risk or Standard Deviation gives a good indication of the variability of annual returns.
No doomsday, Armageddon, end of your world, end of your money scenario here. “Risk” simply refers to how much the price of a security varies about its mean.
When you engage an Investment “Advisor”, s/he will give you a questionnaire designed to determine your “Risk Tolerance”. Based on your risk tolerance, a portfolio will be recommended to you. This portfolio will be designed to match your ability to withstand market volatility without selling everything and bailing out of the market.
Read more: Standard Deviation & Value At Risk https://www.investopedia.com/walkthrough/fund-guide/uit-hedge-fund-reit/hf/standard-deviation-value-at-risk.aspx#ixzz5ARL2yfIj
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RISK – Conventional Wisdom Version
The risk that the price of your security will have large variations from the mean price over the period in question; i.e.high volatility
In other words, the risk that the price of the security can change dramatically over a short time period in either direction .
A lower risk means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
Here is a typical reference to risk from a typical investment magazine, Investopedia.
The higher the potential return of an investment, the greater is the risk.
An Example of a High Volatility Stock = High Risk
Large variation from the mean over the time period of interest.
Low Volatility Stock Fund = Low Risk
Small variations from the mean over the time period in question.
How to “Reduce Risk”?
Diversify Your Portfolio!
This quote from “Future Advisor“, an on-line Investment Advisory firm says it all:
“Ultimately, you want to end up with a stocks-bonds mix that’s consistent with your true tolerance for risk, and that you can comfortably stick with even when the market heads south.“.
In Essence, Using The Conventional Wisdom Concept of Risk …
To prevent panic selling, include “low risk” (low volatility) securities in your portfolio because they will not lose value as fast as will “high risk” (high volatility) securities.
Investing For Retirement’s Concept of “Risk”
RUNNING OUT OF MONEY
How to Reduce Risk?
Select investments that, while riskier in the conventional wisdom, are less risky in the IFR’s version of risk.
That is, buy and hold funds (TBA) that perform better in the long run than funds whose performance is hobbled by their aversion to risk.
Follow the strategy presented on this website.
. long term horizon,
. faith in the history of the market,
. dollar cost averaging,
. buy and hold,
. ease of investing
combine to ensure that there will be sufficient money to last throughout your retirement.
Confirmation of IFR’s Concept of Risk
Here is a clip from a Gallop poll that identifies the real risk facing the IRA Investor:
Personal financial concerns vary significantly across age groups. The top problem for the broadly defined group of middle-aged Americans — those aged 30 to 64 — is not having enough money for retirement, in line with previous findings, for this group, about seven in 10 worry about not having enough money for retirement
Gallop Poll, April 22, 2014
Confirmed with this 12/4/2016 article from MarketWatch “The Number One Regret Of Older Americans“.
And finally another Gallop Poll from 2016
Nowhere in the chart does it say…
“I’m afraid of my portfolio temporarily losing value”
Because investing evokes emotion, success depends on a long-term perspective and a disciplined approach. Abandoning a planned investment strategy can be costly, and research has shown that some of the most significant derailers are behavioral: the allure of market-timing, and the temptation to chase performance and the temptation to quit when the market goes into the tank.
Far more dependable than what the market is doing at the moment is a program of steady saving. Making regular contributions to a portfolio, and increasing them over time, can have a surprisingly powerful impact on long-term results
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