Hello, and welcome to the Life By Design podcast, brought to you by Strategic. This podcast is all about helping you live your great life.

Each episode will feature insights from our Chief Investment Officer, Doug Walters. welcome back to the Life By Design podcast.

Doug is joining me again. Here I am.

And, uh, today, uh, we're, we didn't do a Weekly Insights this past week, so we're just gonna skip right into the topic at hand. Yeah, every once in a while, we need a week off.

Yeah, right. We do, yeah, we give, we give Doug some time off here and there so he can rest for the, for the next Weekly Insight, um, and, and today's topic, uh, is, is risk.

That's right. And so, when we typically hear risk, especially kind of when it, when it's in regards to finances or the market, we, we generally think of the market fluctuations as kind of risk.

But really, there are other areas that risk can also be associated with that we deal with on an a- almost daily basis. Right.

Yeah, it is so easy to talk about risk as volatility. That's what those ups and downs are called, volatility, because, you know, if you go back to your Finance 101 and you look at your, um, you know, your, your, you know, portfolio, your, uh, portfolio construction equations if you will, they're all built around volatility as the risk measure.

truth is, that is just one measure of risk, and arguably not the best measure of risk for long-term investors. All right.

Well, then what is the best? Well, let's put it this way.

Yeah. Think about, if you're a long-term investor- Mm-hmm.

You just want to make sure that you get from, from A to B. So, those ups and downs, those short-term, uh, moves just really don't impact you and shouldn't impact you.

Mm-hmm. So, this idea that volatility is a good measure of risk in finance, um, doesn't really apply very well to, like, long-term investing.

Right. Because in that, in that regards, if I'm understanding this correctly, the risk is that number that I'm trying to get to.

So, so whatever goal I set for myself to be, uh, when I retire, I should have X dollars in my retirement savings, whatever vehicle gets you there, but I should have X dollars in my retirement savings. The risk is only if I don't reach that number.

Right. Not necessarily the path that got me to that number.

Right. And there's no, there's no f- no formal financial term for that.

Mm-hmm. We call it, sometimes we call it mission failure.

Mm-hmm. Right?

Or just failure to reach your goals. That is the ultimate risk for a long-term investor.

If you don't reach your goal, you know, that's, uh, obviously not a good thing, but what we can talk about is the risks in the meantime that might cause that, like what might cause you miss that goal. And to me, those are the more important risks that we need to think about day by day.

Mm-hmm. Yeah, and I think one of them, uh, that we talk about a lot, and it really struck me, we, we had done last year, and we're, we're doing it again this year, but we had done a retirement master class, and, and when I was building out the slide decks for the team, and, like, we were getting ready, like, one of the things that really struck me that I personally had never thought about before is that retirement number we just mentioned, right?

That's what I need because, uh, and that's all I'll need when I retire at 65, you know? That's, uh, that's how much money I'll need.

But the reality of that is that, like, if I can retire at 65, I may have another 30, 35 years past that, you know? People are living longer and longer, so 95, 100 isn't unheard of, uh, anymore, and so, like, I, I also need money that's gonna stay then keep my, my, you know, my level of living, uh, where I want it to be during my retirement years.

Right, yeah. So there's another risk, longevity risk, the, you know, the idea that you might live too long.

Yeah. You might outlive your money.

And so, it's really important to plan in, you know, a margin of safety to ensure that if you do live to be 100, that there are funds there to cover that. And, you know, the way I like to think about it, if you, you, you know, it's a great way to think about it, like, long-term planning, you know, getting from A to B, is there's some rate of return on your investments, some performance measure that is going to get you from A to B.

You're putting aside, you know, $1,000 a month. You assume some rate of return.

Let's say it's 7%. Is that going to get you where you need to give you that margin of safety, uh, in retirement?

And that's sort of the starting point, and you kind of have to work backwards from there. If 7% isn't enough, then maybe you need to take more risk.

So, this brings us to another measure of risk, which is not taking enough risk, if you're too conservative. Yeah.

If you put all of your money in, in cash, you may not get there unless you have a really significant income coming in. But if you're relying on in-, you know, solid investment returns over the years, you're gonna re- need those returns to be a certain amount.

and that amount can be determined, um, you know, by that ultimate goal you're trying to achieve. And this is, you know, for us, uh, and I assume other, uh, but when, when you're asked as an investor or you're coming in for financial planning advice what your risk tolerance is- Right.

that's what we're referring to, is saying, you know, "Hey, are you, you okay? Like, 'cause we're gonna have to, if you wanna get to your goal, like, you're gonna have to get a little riskier if you wanna make that happen." Right.

Right. So risk tolerance, when we, we're thinking about that, we wanna understand the client, right?

What is their- Mm-hmm. risk tolerance?

What we were just talking about was sort of, like, what's their need- Yeah. to take risk?

So you wanna think about what's their tolerance for risk, but also how much risk do they need to take to get where they need to go? And you ha- really have to, you know, sort of balance both of those.

That need part though, is, uh, is really important. And so we're saying the word risk a lot.

And in that example, what is, what, what are we talking about? Like, what is th- what does that word mean?

Right. And that is, again, we're sort of falling into this trap of talking about risk as volatility again.

Yeah. So when we're talking about taking more or less risk in your portfolio, we're typically talking about the allocation to riskier assets like equities, which have a tendency to go up and down quite a bit, and bonds or treasuries that are a little bit more stable, income-producing.

So the more you have in the riskier assets, the more volatile assets, uh, the riskier your, your allocation is, but also the greater your expected return is if you're doing, uh, a good job in those, in that allocation. Yeah.

Yeah. And so it's almost depending on you as the individual and where you're at in your retirement savings, uh, journey, it's gonna, you know, you may have to take a risk.

If you, if you have a certain number or, or you sit down with one of our advisors and we're l- and they tell you, "Hey, you need to be at this dollar amount by this age," and in order to get there, you, you know, you may have to be riskier. And that's- Right.

Yeah. So this is, this is almost the easy part.

Right. We can say, we can do a retirement forecast.

We can project what does Jay's retirement look like X number of years from now. Mm-hmm.

And we can plug in expected return based on this risk that we're taking, you know, this mix of equities and bonds. In a way, that's the easy part.

The journey along the way is where investors have the potential to introduce additional risks that they- Hm. don't need to be taking.

And those are, I would say, um, the more important risks to consider. Okay.

And that's where we're talking about things like permanent loss of capital. Yeah.

And so permanent loss of capital, think about it, uh, in the most simplest firm, uh, in, in the most simplest terms, if you own a stock, right, you own a company, a s- individual company, that company can go bankrupt. Hm.

If it does, that, the value of that stock is zero, and it is never coming back. Your, you know, the value of your investment has been lost permanently.

Hm. So when we think about investing that risky part of your portfolio, we wanna make sure that we're going to avoid the best we can that permanent loss of capital.

So we do that through diversification- Mm-hmm. making sure we're investing in a, a variety of, of companies.

We want to avoid concentration risk, not having, you know, all of our assets, maybe they're in a bunch of companies, but they're all in the same industry. That's- concentration risk.

Uh, or even, you know, the, the S&P 500 last year was, you know, you know, 20, 30% of the assets of the index were in a handful of companies. That's concentration risk.

Hm. So, they, you, when, any time you have concentration risk, you're increasing the probability of permanent loss of capital.

The other thing we want to avoid are assets that just don't have any real financial backing, like cryptocurrency. Mm-hmm.

You know, we talk a lot about how cryptocurrency is not an investment. It's not an investable asset.

It is really driven, its price is driven by demand not, say, company earnings or some sort of financial backing. It's literally- Yeah.

just demand-driven. If demand dries up, you're gonna suffer permanent loss of capital.

Right. Yeah, it's really interesting.

And, and also, um, you know, and it's funny. I was, I was talking to one of our advisors here about, you know, my kids, they're getting older and they're starting to, like, put money away and stuff like this, and one of the things we talked about is, yeah, maybe they should just put that money, uh, into an IRA because then they can't touch it, right?

And so there's your own personal risk of, like, seeing cash in the bank or something and going, "Oh, yeah, I could spend that and go buy that car." In my son's case, he wants to buy a car, but, like, you know, "I could spend that money on a car." Or, you know, the less, uh, "sexy" option is for him to put it in his IRA now so that he can't, you know, he can't really touch it, so that- Right. it's in a retirement fund.

Yeah, and that kind of gets to behavioral risks, right? What you're trying to avoid is, you know, bad behavior, bad financial behavior anyway, um, you know, pulling money out that should be invested for the long term, or even the money in that IR- IRA, making sure that you're not market timing.

Yeah. Right?

Getting, uh, you know, getting nervous and take it out of equities, put it all into cash. That sort of behavior, again, can lead to another form of permanent loss of capital.

If you try to market time and stocks rip and they go up 10%, guess what? You're, you're not getting that back.

You lost that opportunity. Yeah.

Yeah. Yeah, and, and a little, like, warning to that for folks.

You know, I think a lot of times with the market timing stuff, we only hear about the positives. Yeah.

So, we only, like, you know, GameStop, NVIDIA, like all these things. We hear about all the positives, right?

And like, "Oh, I made X dollars and I did this and blah, blah, blah, blah," right? We don't hear about all the stories about all the f- all the people who either started late or tried to time it again and then actually lost a ton of money, and then owe money at this point, right?

Right. And so, you know, it's, uh, it's just as bad.

It's the, it's the casino, right? Like- Yeah.

yeah, yeah. You could maybe, you might, you might be able to do it, but you probably won't.

Right. So Right, yeah.

Market ti- market timing is really tough because you actually have to get it right twice. You have to get it right on the way in and on the way out.

Yeah. And the chances of doing either with, uh, exceptional timing is, is really low.

Uh, yeah, and so what other risks do we have? So, there's liquidity risk.

We've been talking a lot in the last few weeks about alternative investments. So, you know, private equity could tie up your money in funds.

If you happen to need that money for some reason, uh, it's, it's tied up, right? There's, you have lost, there's no liquidity there.

You're not gonna be able to sell those assets, or if you do, it's gonna be at fire-sale prices. So, liquidity risk is a, is a really important one, and I'd say the other important one to keep in mind, and we sort of touched on this with the, the mission failure, not quite getting where you need to go, which is inflation risk.

Uh, inflation is real. Even when it's low, it tends to be a positive number.

"And whatever I make, I'm just gonna stick it under that mattress." Well, that's earning nothing. Hm.

It's earning zero, and if inflation is 2 or 3%, your purchasing power is deteriorating. So, you're actually losing money rather than saving money.

Right. Yeah.

So, so you need to at least be investing enough to cover inflation, and that just keeps you at break-even, and then anything above that is y- our, you know, actual, real investment returns. It's cash.

It'll always be cash. Like, it's a dollar.

Right. It's that things, whatever you, the value of that dollar was in the market at that time, uh, can shift over time and, and be maybe less, and then that dollar's not worth as much as it was when you put it away.

Making sure you're keeping up with that. Right?

like, do you plan on having the same bills and, and Or, or the same standard of life as you have today while you have a full-time job when you're retired? Because that's, that's gonna take X amount of money.

Right. You know?

Or are you gonna pull back and, you know, hopefully you'll have a bunch of stuff paid off like your house and, you know, and all that, and you're just gonna kind of be a little bit more relaxed? Think that through.

I think the power of doing a retirement projection- Mm-hmm. being able to see what that looks like in numbers, what your life can look like down the road and making sure you have enough to support that.

And I would suggest if your advisor has the ability, to ask them to put in, you know, 0 returns or ju- returns just equivalent to inflation- Yeah. and see what that does to that number 20, 30 years down the road.

You, uh, might be surprised how big of an impact it has. It's just so important that risk of not earning a return over these, you know, these earning, investing years is, um, is really high.

Yeah. Yeah.

Yeah, that's incredible. Uh, any other risk that we should be looking out for, Doug, do you think?

Those, um Those are the big ones. Those are the big ones.

Yeah. Yeah, yeah.

That, you know, permanent loss of capital, behavioral, um, inflation risk, liquidity, liquidity risk. All of these, um, are again, much more important than those day-to-day ups and downs.

Mm-hmm. And I'll just leave you with this thought.

Yeah, yeah. Okay.

Leave you with this thought. When you talk about volatility, if I measure the volatility of a stock- Yeah.

If your portfolio is going up significantly day-by-day because of a few of these, these stocks, um, if it's up, it's not a bad thing, right? So up volatility is a bad thing.

Down volatility, I suppose is, is, uh Did I say that back- Yeah. wards?

Yeah, yeah. Up is good.

We kind of want upward volatility. Yes.

Well, and I And I It's worth repeating, and I know we've probably said it on almost every episode of, of this podcast, but And, and that's one of the things I think your team and you live by, is we're not looking at the day-to-day, right? We're looking over a longer period of time and we encourage, if you're listening to this, look over the longer period of time because the day-to-day is going to drive you, drive you nuts.

Yeah. You want to, you want to look over a year, 5 years, 10 years, you know, and then see where you're at, not what happened hour to hour today.

Trust me, we will be watching- Yes. the day-to-day and we'll be taking advantage of those ups and downs.

Uh, that's what we do. That's how we, we can add value.

We've got that. You worry about your end number.

All right, Doug. Well, thank you so much.

All right. You're welcome, Jay.

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