By: Ian Maddox, CRPS®
2017 proved to be an outstanding year in the stock market, almost completely void of volatility. 2018, on the other hand, has delivered a series of ups and downs, and as of today, the major indexes have made little progress. Broad market volatility and interest rate movements have kept stocks and bonds on their toes. The perception is that risk has returned, but what exactly is risk?
A basic definition of risk would be any situation involving exposure to danger – the possibility that something unpleasant or unwelcome will happen. When we drive to work each morning, we might crash into another vehicle. When we eat cheeseburgers daily for lunch, we might end up having a heart attack etc. These are examples of risk, but how do we apply the term when it comes to investing?
Academics will throw out a bunch of terminology: market risk, political risk, currency risk, interest rate risk, credit risk, longevity risk and many others. Any and all of these can and do impact the value of a particular investment at any given time. But any given time is just that, a singular moment. An investment vacuum, so to speak. We should be careful in making rash investment decisions based on singular moments. Unfortunately, risk, or the perception of risk, can cause us to do exactly that and the volatility of 2018 is no exception. We need perspective to truly understand risk and its application to a subject as personal as our financial assets. In this way perspective is provided in two forms: time and purpose. Time is simple, how long do we have to invest. Purpose is the outcome we desire from an investment or group of investments over a measured period.
Clearly, time and purpose differ from one investor to the next and so in our financial planning model we have found it helpful to group individuals into one of three initial categories: those in their 20’s and 30’s, or the “Plant” phase , those in their 40’s and 50’s, or the “Grow” phase, and lastly individuals 60+ which fall into our “Enjoy” phase. Investment risk applies in each of these categories, but I want to specifically address those in the “Grow” portion of their planning. From observation it is in this phase that people seem to become aware of risk. When we are younger, we have longevity on our side and are unlikely to have accumulated much monetary wealth. Individuals in or near retirement have decades of experience watching the markets ebb and flow. Those in their 40’s or 50’s have likely accumulated enough wealth to take notice when markets become erratic and it is this “noticing” that creates a sense of financial risk, perhaps for the first time.
Unfortunately, “firsts” make all of us uncomfortable and it is human nature to seek a place of comfort. We may make an investment decision based on perceived risk that is in fact detrimental to our long-term investment purpose simply because it seems to provide immediate comfort. Action should always be checked back to a plan because tactics serve strategy. Considering recent market volatility, my sincere encouragement to the “Growers” out there is to first measure before you manage.
About Hitchcock Maddox Financial Partners (HMFP): HMFP is a comprehensive and collaborative financial planning firm headquartered in Trussville, AL, serving clients and their community since 1999. Collectively, HMFP advisors have provided guidance in the areas of Financial Planning, Investing, Retirement and Insurance for over 35 years. For more information please visit www.hmfp.us or call 205-201-1401.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Hitchcock Maddox Financial Partners, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal.