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Risk And Volatility Thumbnail

Risk And Volatility

I was talking to someone the other day and they asked what I did for a living. I said I'm a financial advisor and I specialize in retirement income and investment planning. Simply put, I help my clients make a plan to not run out of money in retirement.

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. They are two totally different things.

What is risk?

To paraphrase the dictionary definition risk is a situation involving exposure to danger. Pertaining to investing, I define risk as the chance of permanently losing your money.

What is volatility?

According to the dictionary volatility is the liability for something to change rapidly and unpredictably. As it pertains to investing, I define volatility as the up and down movement of stock prices around an increasing trendline over time. Very similar to the picture below which shows volatility but no risk.

Why does this matter?

We have well over a century of history showing that the real long term return of large company stocks (S&P 500) 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 "safe" 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 which is 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 your money/purchasing power is cut in half.

So if you have all your money in "safe" investments throughout a 20-30 year retirement, without realizing it, you have crafted a plan to run out of money/purchasing power at some point. It's literally inevitable.

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, my friends, is the real risk in retirement.

Perfect security in the beginning of retirement  could equal total disaster later in 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.

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 our mission is to increase your time, money and peace of mind by helping you create an income and investment plan that outpaces inflation and aligns with your retirement goals while guiding you through the completion of that plan year after year.

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.

For more articles about retirement planning and investing click here. 

Brian Coleman/Electric Cooperative Retirement Specialist

Photo by Carl Edwards with The Behavior Gap