Evaluating Tolerance and Assuming Investment Risk
As a young mountaineer, terrifying fear quickly taught me that, short of learning how to assess risk, distinguish calculable and incalculable risks, and manage risks assumed via careful planning and the use of every technical advantage available, my climbing career would likely be brief. Ultimately our fate is in the hands of our Creator, but He has equipped each of us with intelligent minds and diverse talents to thoughtfully employ in every earthly endeavor, which very much includes investment risk-taking. Consider the following factors as you carefully evaluate your own tolerance for, and acceptance of investment risk.
Investment risk begins with cash and equivalents, progresses with ownership of bonds, which involves lending money to governments or corporations, and culminates with taking ownership in the stock of public companies. Low risk investments involve little or no volatility in values, but also offer the lowest long-term potential returns and least probability of realizing a positive return after taxes and inflation. High risk investments involve periods of significant volatility in value, but also offer the highest long-term potential returns and greatest probability of realizing a positive return after taxes and inflation. Before deploying hard-earned capital, it is critical for investors to understand the level of risk required to earn the return needed to help achieve their financial goals. It would be foolish for a climber to choose the most dangerous route up the mountain to rescue an injured friend! Retirees living on investment income must also limit portfolio risk to that which will allow them to recover from temporary market losses while generating income distributions. Hundreds of formidable mountains are littered with the corpses of former climbers who failed to understand this concept!
Assumption of risk should also consider:
Proximity to retirement; Recovery from temporary losses generally requires time. Never ask a down market for that which it may be unwilling to give.
Investment objective; the protection of capital, income generation, and asset appreciation each involves differing levels of risk. Your investment independence requires a compatibility between your goals and the amount of risk your investments are actually exposing you to.¹
Emotional capacity to endure temporary loss; never ask for the endurance of more pain than your weakest self will accept. Discover this through deep consideration as opposed to experience.
Think about it, and may God bless you in the matter risk-taking, Shaun.
“He who observes the wind will not sow, and he who observes the clouds will not reap” ~Ecclesiastes 11:4
“Have I not commanded you? Be strong and of good courage; do not be afraid, nor be dismayed, for the Lord your God is with wherever you go.” ~Joshua 1:9
1 Dr. Eifrig’s Health & Wealth Bulletin, “I Dread This Question”, November 2, 2023
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
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