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Understanding Investment Risk

September 05, 2022


The longer your investment time frame the greater your investment performance.

Understanding Investment Risk – It's a Matter of Time.

How we view investment risk is shaped by our time frame. The shorter the time period, the more sensitive we are to risk and conversely, the longer the time period the less sensitive we should be.

In its simplest form, investment risk is the exposing of your investment monies to the chance of loss.

Any sound investment goal needs to be cast with a time frame in mind.

Suppose you want to invest $100,000 for 1 year, achieve an 8% return, and for your investment to never be worth less than $100,000. Your goal is to only gain and never lose. There is nothing wrong with that goal. It’s a rational goal. However, it is not achievable, at least in the current financial environment and not even in the past two decades. The risk tolerance is so constraining that it prevents the goal from being achieved.

But let us say you have the same goal of 8% but now your timeframe is 10 years and you’re ok with the value of your principal going up and down so long as at the end of 10 years your money earned an annual return of at least 8%. You still have the “risk goal” of not losing any of your original principal but now the timeframe is expanded to 10 years. How likely is that?

The following table provides the performance data for the last 10-year period of 7/1/12 - 6/30/22 for a $100,000 Investment:

Investment Name                           CAGR1                   Worst Year         Ending Balance

S&P500 (SPY)                                     12.86%                      (19.98%)          $335,236

60/40 Portfolio2                                8.19%                        (17.04%)          $219,684

1CAGR = Compounded Annual Growth Rate

2 60% Stocks (VTSMX) and 40% Bonds (VBMFX).

Source: Portfolio Visualizer

Note that this 10-year period included 2 Bear Markets (loss of 20% or more) and at least 7 Corrections (loss of 10% or more)

Let’s compare the outcomes of the two goals at the end of the 10-year period:

Beginning Value               Ending Value     Investment

Goal 1                   $100,000                              $110,462              12 month Jumbo CD1

Goal 2                   $100,000                              $219,684              A Moderate 60/40 portfolio2

1  Assumes earning 1% per annum. This is generous since the rate began the period at .28% and has averaged less than .5% the entire 10-year period.)

2 60% Stocks (VTSMX) and 40% Bonds (VBMFX).


The only good reason to pull your money out of the stock market now is the very same reason it never should have been in the stock market to begin with, and that is you will need to withdraw all or most of your monies within the next couple of years. Otherwise, staying the course of your goal and risk-based investment plan is still the best course of action. Please reach out to us if you have questions or would like to further discuss your investment goals.

Lee Kerr

Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This content was created as of the specific date indicated and reflects the author’s views as of that date. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

Diversification, asset allocation and rebalancing of a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.