Reinvigorate Your Financial Life With Laser Focus on Market Risk and Shortfall Risk
The financial world is noisy and it’s easy to become distracted from your most important long-term goals.
One way to cut through the noise is to focus on just the two factors that ultimately determine your approach to everything else in your financial life; namely, Market Risk and Shortfall Risk. Market Risk is the inherent risk of investing in the market; Shortfall Risk is the risk of failing to accomplish your goals.
We routinely see clients who suffer the effects of “market stress”. In many respects, this is self-imposed worry resulting from a misunderstanding of how capital markets function. Since financial literacy is largely untaught, this lack of understanding is not surprising. Part of our role, of course, is to help clients remain goals focused instead of market focused.
However, since we are all emotional beings, we sometimes see clients react emotionally to market changes. This can set us up the proverbial “horns of a dilemma”, between these two very distinctive types of risk. Without a willingness to accept some level of Market Risk the larger and potentially more problematic Shortfall Risk come into play.
Stay on Course
The dilemma presents itself very clearly. If you cannot accept the normal price changes in the markets, then you likely will find yourself decreasing one type of risk (market risk) and exchanging this for the other type of risk (shortfall risk).
The average intra-year price decline in the S&P 500 is over 14% for the calendar years dating back to 1980. In about 75% of those years, the S&P 500 had a positive year overall. You have to be able to stay on plan (in the market), in order to reap the benefits (the returns). The stress comes from believing that this tradeoff can be avoided; it can’t.
There absolutely are individuals who for various reasons can’t fully reconcile this dilemma. This point should not be downplayed...if you can’t accept the risk, don’t invest in the stock market. You will likely need to adjust your lifestyle and future plans, but that is a financial planning choice.
Most Read IRIS Articles of the Week: May 22-26
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, May 22-26, 2017
Click the headline to read the full article. Enjoy!
I know Gen Y are stereotyped as being transient, digital natives who are impossible to capture, but that is just the world we live in today. Technology has caused a proliferation of advancements and the financial services industry is (or should be) feeling the pressure ... — Missy Pohlig
Combining an alternatively-weighted index with a multi-factor stock screening process can diversify uncompensated risk, potentially leading to less volatility in down markets and an overall smoother experience for investors. But what are factors and why should they be a major consideration for every ETF investor? — J.P. Morgan Asset Management
There is something gratifying about jotting down all the things you need to do. It quenches one’s thirst for being organized and for wanting some control over one’s life generally complicated by too many things to do with insufficient time and financial resources to do them. — Roy Osing
College graduation is a time of celebration and pride. It’s also a time of significant financial transitions—for new graduates as well as their parents. As an advisor, this is a great opportunity to connect with your NextGen clients to help them make smart decisions that position them for greater financial success throughout their working lives and even into retirement. — Laura McCarron
Let your prospects see what working with you will be like, including exactly who will be holding their hand along the way. — Paul Kingsman
How should investors feel with all the advances in robotics and technology in our industry in the near future? — John Alshefski
Want to know how to grow your business fast? Discover here two things that you need to smash in order for you to take your business from startup to a great business. — Stewart Bell
Unlike many other industries, most people in finance confront the reality on a daily basis that a market downturn they have no control over could cast them out onto the street. — Sara Grillo
One year after I risked everything to launch my own venture, I penned a short article chronicling my journey up to that point. One commenter responded with near-vitriol, wondering how I could be so misguided as to influence – encourage, even – others of my generation to take on extensive levels of risk in order to successfully launch a new business. — Brian Hart
People are automating hellos and introductions instead of taking 3 seconds to personally do it. Folks are requiring followbacks if they give you one. Everyone believes that ads are the answer. And business owners think they know what’s best for their social channels. — Ahna Hendrix
Business growth doesn’t come from wishful thinking. As you know, it takes a lot of hard work. The growth of your business is not an option – it is a necessity. Coordinating the right mix of strategies to gain market share and improve client acquisition rates is essential to advance your firm in today’s economy. — Michelle Mosher
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