I was talking to someone the other day and they asked what I did for a living. I said I'm a financial planner and I specialize in retirement planning. I help people create their retirement income and investment plans. Then they asked me about the market and talked about how "risky" they think investing is which got me thinking. It seems there are many people who can't distinguish between risk and volatility. Let's talk about the difference.
What Is Risk?
To paraphrase the dictionary definition, it's a situation involving exposure to danger. Pertaining to investing, I define risk as the chance of permanently losing your money.
What Is Volatility?
The dictionary say it's the liability for something to change rapidly and unpredictably. As it pertains to investing, I define volatility as the up and down movement of prices around an increasing trendline over time.
Why Does This Matter?
We have well over a century of history showing that the real long term return of large company stocks is 7%. Over that same 100 years we have seen that the real long term return of comparable bonds has been 3%.
People will look me straight in the eye and tell me bonds are "safer" and less "risky" than large company stocks? Is that a true statement?
What Is Money?
At 80/20 Financial Services we define money, by it's only sane definition, as purchasing power. Your money/purchasing power loses a fraction of its value every single day because of inflation. Inflation increases on average 2-3% per year which means our money/purchasing power loses 2-3% per year. I'll save you the math but that means every 20 years our money/purchasing power is cut in half.
An individual can have financial security on the front end of their remaining lifetime meaning right here right now. You can put all of your money in bonds and the money you have will barely fluctuate at all. You'll get a little income from that and you'll sleep like a baby because you're not taking on any risk. But one day, in about 20 years, you'll run out of money. You'll run out of purchasing power and that's the huge risk in retirement.
Perfect security in the beginning of retirement equals total disaster later retirement.
You Have A Choice
You could choose to take some insecurity at the beginning of retirement by investing in large company stocks. You will experience volatility, but remember volatility is the up and down movement of prices around an increasing trendline over time.
Some insecurity in the beginning of retirement equals peace, serenity and income later in retirement.
Safeguard your money now and risk your money/purchasing power later. Risk some of your money now to safeguard your money/purchasing power later.
There is no such thing as risk. There is only the choice of what to risk and when to risk it.
You Need A Plan
A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you achieve your desired financial outcomes in retirement.
If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have. The consultation is free and without obligation. Contact us to set up a consultation.
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