A Word About Risk

As a Certified Financial Planner (CFP®), one of the most important parts of my job is assessing each of my client’s comfort level with risk. How I help a “white-knuckle” investor reach their goals is very different from how I work with a client who is at peace with the market and comfortable with focusing on the long term. Interestingly, it is the white-knuckle investor who faces the greatest risk of all. What increases that risk the most? The answer may surprise you.

According to the bulk of available financial planning research today, the main cause of risk for investors isn’t a prolonged bear market. Sure, a far-reaching, multi-decade market crash could come that causes every portfolio to suffer from a prolonged period of terrible market returns, but history says that’s fairly unlikely. It’s even more unlikely if you have a financial plan that is designed to gradually decrease volatility and risk in your portfolio the closer you get to retirement.

So if the market isn’t the biggest element of risk, what is? You, the investor.

The fact is, in times of market volatility, sticking to a plan is often the hardest part of long-term investing. And how investors react to movement in the market is the greatest risk of all. But a quick look at the history of the market offers some perspective that can help reduce that risk and keep you on track—no matter what curve ball the market throws next. Here’s what you need to know:

  • The market has always ebbed and flowed. That constant movement comes with the territory. Historically, the market has seen a sustained drop of 20% for more than three months (the technical definition of a bear market) about every four years. About every two years, the market goes down by that much for a shorter period of time.
  • Investor behavior is the reason for every market drop. When investors see the market shifting downward, they tend to panic and sell off what they own to avoid losing more if the market continues to drop. Anxiety can be high—and sleep non-existent—when 20% of your portfolio is suddenly washed away, and that reality causes people to react, which results in even more volatility.
  • A sound strategy and a trusted financial advisor can help keep investor behavior in check. One of the most important jobs of a good financial advisor is to balance each client’s anxiety with normal market movement by figuring out what the client should be invested in, and clearly communicating to the client how their personalized strategy addresses their long-term goals.

Years ago, I happened to sit next to an airline pilot on a particularly turbulent flight. On his other side was a white-knuckle flyer. I loved hearing the pilot calm the nerves of the scared passenger. What he said was this: “No one likes turbulence, but other than a spilled coffee of two, it has no impact on your safety. As pilots, we have to weigh the comfort of flying around a storm with the time we lose by doing so—and the potential for arriving 20 minutes late and causing passengers to miss already tight connections.“ In other words, it’s a choice that’s all about comfort. Safety—or risk—isn’t even part of the equation. (Luckily it is the pilots, not the passengers, who get to make the choice!)

In the investing world, financial advisors are much like pilots, using our knowledge and expertise to help each client reach their desired destination (usually retirement) while keeping them as comfortable as possible along the way. Here are just a few ways your financial advisor can help you safely and comfortably reach your goals when the market swings south:

  • Your financial advisor can help you see the opportunity presented by a down market and how you can use “sale process” to your advantage to help you meet your goals.
  • Your advisor can walk you through how your KP pension helps protect your assets against market volatility. (This is fairly easy to do using a simple spreadsheet and information from Mercer.)
  • Your advisor can help pinpoint how much money you will need on the date you want to separate, and then allocate the retirement assets within your portfolio to help you reach that goal.

As a physician, you’re as unlikely to know how to manage your complex financial needs as I am to know what quantity of antibiotics will cure my ear infection. That’s precisely why your patients come to you for help—and why wise investors get help from a Certified Financial Planner. Risk will always play a role in investing, but with the help of a trusted financial advisor, you can assess and mitigate risk, manage your emotions and, ultimately, be sure you’re on track toward your retirement goals so you can enjoy the flight!

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Advisory services offered through EWG Elevate, Inc. dba Eagle West Group.

This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.