It’s a phrase we hear often, some iteration of “We’re not risky investors”. And that’s great news because we don’t want risk-taking maniacs as clients.
But we do need to understand what we mean by “risk”. Most of the population, including the regulators, providers and professional bodies misdefines risk.
Risk to you is outliving your money. Everyone wants to avoid that, nearly no-one thinks about it, or is even encouraged to do so.
Ultimately you have one, massive financial objective:
“30+ years of decent afterwork income that keeps pace with inflation.”
Ambitions beyond that (helping the kids, big adventures, sportscar, holiday home, etc.) are great, but a growing income stream should be the number one objective, and therefore your main focus.
Falling short would be nothing less than a disaster; you do not want to increase the chances of that happening.
Unfortunately many innocently engage in bad thinking and behaviours that makes falling short more likely. These are often in the form of investment strategies and tactics that might make sense in the moment but cause long-term irreparable damage.
Financial planning is not about disasters it’s about feeling safe.
Now, don’t get me wrong, to know and feel you’re safe, you have to accept that the value of your investments will fluctuate over time. That fluctuation is volatility, not risk, and therein lies the fundamental misunderstanding in swathes of investors’ minds.
We accept volatility with the reassurance that the long-term record proves it to be a winning strategy. It’s always worked out well if you can accept volatility and stick to your plan when volatility spikes.
Financial planning has a minimum time horizon of 30 years that can easily run into 80+ once children and grandchildren are included as they should be. Therefore, what happens to investment markets over 30 hours, days, weeks or months may be interesting but it is definitely irrelevant.
A low-risk investor always wants returns greater than inflation and costs over the long-term to produce an afterwork income that keeps pace with inflation. They also want their short-term spending needs to be covered by guaranteed / known income sources and for everything to be protected should disaster strike.
That’s much more easily achieved than most imagine. Sure there will be ups and downs and some tough decisions to make but that’s just the nature of life, isn’t it?
There’s no such thing as risk-free, but low risk great outcomes are available to all.