Risk Does Not Always = Reward

As seen in South Lake Neighbors Magazine (March 2018)

By Marc D. Langva, CFP ®

If you ask my family, friends or neighbors about me you might hear that I’m a risk taker. I love to shoot down a single track on a mountain bike, tear through a NASTAR course on skis, or jump my old school BMX bike off our dock.

However, when it comes to investing, risk just isn’t my idea of fun. Maybe it’s because I work way too hard and don’t want to see my money disappear. Maybe I feel a responsibility to my family. Or maybe I just can’t get past the math.

You see…the soft underbelly of risk is volatility! Fluctuations in your portfolio affect your real return. Wall Street and advisors use average returns because they look good and sound good, but as far as your real results, well let’s just say that’s a completely different story!

I’m going to show you a real example in action;

The Smiths & Jones both retired in 1998 with Million-dollar portfolios and each couple withdrawals $60,000 annually to live on. This is where the similarities end.

The Smiths are quite conservative and opted for a broadly diversified portfolio (less volatile). The Jones on the other hand, don’t mind large fluctuations in their portfolio and therefore take more risk.

Well…how do they both compare over time? In 1998, the Dow Jones Industrial Average stood at 8,000 and now it stands at 26,000. The Jones are riding high on their recent returns, oblivious to the impact volatility has had on their portfolio. As far as they can tell, and what Wall Street has told them over the past 20 years, their average return is 8% and they are feeling really good.

It’s a good thing they haven’t calculated their real returns because they wouldn’t feel so hot today. It’s even a better thing they can’t see their neighbors’ results! They would be shocked to learn their neighbors, the Smiths, whom actually have had a lower average return, have a million dollars more in their retirement portfolio.

Wow! What a difference volatility makes! While the Smiths are set for life, the Jones are one market meltdown away from going back to work. Remember…average returns are misleading. Consistency counts and real returns matter.

If you want to take risks, go base jumping off a low bridge. But when it comes to your portfolio, take the road less traveled. Simply sit back, relax and let the herd take the risk while you take the returns.

Margaret Leto March 13th, 2018

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