Macro Minute: Week of September 25, 2023
Let’s talk about risk and its counterpart, luck, for a minute. When most people think of risk they rightly think about the potential of loss. We have also covered how we feel loss twice as much as gains before. Is it any surprise then that we spend most of our time avoiding risk taking? When I first heard someone talk about the other side of risk, luck, I had to think long and hard about that concept. I still find myself mentally prodding that thought like a tongue looking for missing tooth.
Now, let’s talk about how risk is measured in investing. Risk is used interchangeably with volatility in finance. To my mind that has never made sense. Volatility is just unpredictable price movements and does not necessarily mean gain or loss. The more and more I have thought about volatility in this risk/luck framework, the more I have come to realize that volatility is the price that is paid for the chance to be lucky. Now, when I say luck I by no means want to undermine the skill and work that is done in security selection and portfolio construction. I just want to highlight that for everything that can go wrong and lead to bad outcomes that things can go right and lead to good outcomes.
Working at a financial planning firm, I feel it necessary to highlight one scenario in which volatility can be more risky than lucky. Withdrawing during volatile times can be detrimental to your portfolio and can lead to running out of money. This is why it is important to have a financial plan that addresses these different scenarios. I hope that this can help you to think a little bit differently about investing and price movements and realize that if you minimize risk, you are also limiting your chance to get lucky. I hope we are all found lucky and blessed.
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