Risky Business

With regard to investing, you will often hear much discussion of risk and risk tolerance. Often you’ll hear that the more risk you take, the higher your potential return. However, that also, of course, means the higher your potential loss. In investing, there are several defined types of risk. Here are a few examples:

• Market risk – The possibility of loss due to a general decline in the markets due to economic, political, or other factors
• Inflation risk – The possibility of a decline in purchasing power of your invested dollars due to prices rising as a whole
• Interest rate risk: This usually refers to bonds and the increases or decreases in interest rates which have an inverse relationship with the price of bonds
• Default risk: This also refers to bonds and is the risk that a bond issuer will not be able to pay interest or repay principal to a bondholder

Financial advisors may discuss these particular types of risk and then discuss diversifying your portfolio to mitigate some of the risks. Often, they will also discuss your particular risk tolerance, and ask whether you would be able to withstand a certain amount of loss in your portfolio. While this can be useful, most of us are subject to what is called loss aversion bias. This simply means that we are much more affected by a loss in our portfolio than we are a gain of a similar amount. We notice and react to the losses much more than we do the gains. It can be difficult to look at the long-term success of our portfolio when we’re in the midst of a short-term loss. For this reason, at Anderson Griggs we discuss risk tolerance and the potential losses of your portfolio, but we also know that even if we all agree that we’re comfortable with that potential loss, it is still not going to be very comfortable once it’s actually happening. Our job is to use our knowledge to manage your portfolio with investing risks in mind, as well as to help you navigate those rough moments and stay the course to meet your goals.

On that note, we also believe that the best way to discuss risk in regard to your portfolio is whether you are meeting your particular needs and goals. This is why we spend so much time discussing your financial situation – your monthly expenses or any upcoming plans, how you’d like to spend your money in retirement, or if you’re planning to leave funds for others. When we are managing your portfolio, we want to manage it with those goals in mind. It is easy to get caught up in a numbers game, noticing those day to day movements of the markets, or letting the financial news get us worried about the effects of day to day occurrences in the world. However, it is important to review your portfolio in terms of your specific situation and needs, and judge your investing success by whether you are meeting those needs.

Finally, I’d like to end this discussion of risk with a quick reminder that while your portfolio is absolutely important, there are so many other things that are equally important when it comes to life satisfaction, and in particular, a satisfying retirement. Staying active, socializing with others, finding a sense of purpose, continuing to learn new things, fostering optimism in ourselves, and being grateful for what we have are all things that have been shown to increase happiness and satisfaction in retirement. (1) While it’s important to plan for financial matters and keep an eye on your portfolio, it’s good to keep those things in mind and remember the big picture.

I hope you’re all enjoying the last bit of summer. As always, give us a call with any questions or concerns.
Libby Anderson, CFP®

1. Schroeder, Jacob. “Happy Retirees Have These 7 Habits in Common.” Kiplinger. https://www.kiplinger.com/retirement/happy-retirement/601160/7-surprisingly-valuable-assets-for-a-happy-retirement