Everyday life is full of a myriad of risks. From the moment that we get out of bed in the morning until we go to sleep at night, risk is a close companion. To go about our life, however, we make a judgement that most of these risks are small and what we are doing in our life is worth taking the risk.
Most investors equate risk with short-term market price variability (like we have been experiencing lately). Market risk is much like the risks we face all day, every day in our lives. This type risk is “baked into the cake” and can’t be fully eliminated.
Your largest risk, however, is what is called Shortfall Risk. Shortfall risk is failing to meet your life goals, such as maintaining your lifestyle throughout retirement. Just as we have to get out of bed and participate in order to live and grow, we have to participate in the market in order to avoid Shortfall Risk.
How we deal with risk and uncertainty ultimately determines if we accomplish our meaningful life goals, or if we have a shortfall. It helps to recall why we are investing in the first place. Remember that market risk is temporary, while shortfall risk is often permanent.
The Power of Professional Advice
David Booth, Founder and Executive Chairman of Dimensional recently recorded a brief video titled The Power of Professional Advice. As a Kansas native, David has a folksy way of describing investment truths. As he says at the end, the main value of a good financial advisor is to provide you “the best chance of winning, whatever winning may mean to you.”
If we can pay less attention to the near-term risk and more attention to the far-term risk, we indeed have a better chance of winning. Start there. Ready for a real conversation?