What Is Risk Anyway?
My first career out of college (after a brief stint in the Peace Corps) was in Outdoor Education. In plain English, it meant I got paid to take kids into the woods to do fun—and sometimes risky—things. Pretty sweet gig! On any given trip we had a long list of things that could go wrong: getting lost, bee stings, bear encounters, hypothermia, heat exhaustion, cuts, bruises, dehydration, hyponatremia—you get the idea.
For this reason (and because insurance companies exist), we spent far more time predicting and limiting these risks than actually doing the fun activities most people probably imagined we were doing. Randy, one of the leaders I worked with, would begin each risk-management session by saying: “Well, whatever else happens is going to happen.”
Fast forward to today, and I find myself dealing with risk in a completely different arena. Early in my career I came across Carl Richards, a financial planner known for distilling complex ideas into simple one-liners and cartoons. One of my favorites: “Risk is what’s left over after you think you’ve thought of everything.” Oh boy—if only Randy had trademarked his idea 15 years earlier!
How We Think About Risk
I love that quote because it perfectly sums up our approach to financial planning. We do our best to identify the risks to your plan, but we also accept that we can’t predict everything. Just off the top of my head, we routinely plan for:
Economic downturns
Loss of income, whether temporary or permanent
Debt
Insufficient savings
Permanent loss of an asset or portfolio
That last one is often the most misunderstood. People will say things like, “The market is risky,” or “Investing is just like gambling.” The truth is, if you follow best practices, investing is only like gambling from the casino’s perspective: with enough tables and time, the house always wins.
What most people call “risk” is really just volatility—the normal ups and downs of the stock market. That volatility is the very thing that produces long-term growth. If your stock goes down 20%, have you really lost 20%? Of course not—unless you decide to make that loss permanent by selling. A stock is only truly “risky” if one of two things happens:
You sell it in a downturn.
The company goes out of business.
The latter is easy to plan for: build a diversified portfolio and stick to a disciplined investment process (like our approach to managing investments). The former? That one’s trickier. Because the biggest risk to your portfolio is staring at you in the mirror.
The Advisor’s Role
One of the biggest misconceptions about what we do is that our job is to get the best returns for our clients. The reality is that the most important thing we do is help mitigate risks—especially the behavioral ones. That means building plans that keep clients from making decisions based on fear, like selling during a downturn. If we can do that, clients have an excellent chance of reaching their goals.
How we apply this: knowing that the biggest risk is a client deciding to sell when the market is down, we design portfolios with the return potential needed to reach goals—without adding unnecessary volatility that might tempt them to bail out.
Case Study
In December 2019, I met with a physician who had just inherited about $1,000,000. She was in an underpaid specialty and behind on retirement savings. This inheritance was a golden opportunity to catch up, as long as she made wise choices.
She didn’t have much investing experience, so we spent months discussing diversification and the history of the markets. She was nervous about “risk,” so with each meeting we reviewed progressively more conservative portfolios. Then February 2020 arrived. As the pandemic hit, she pointed to the market crash as proof that she was right to stay in cash.
We continued meeting monthly for the rest of the year. I emphasized that while she saw the downturn as validation of her fears, it was actually a rare chance to “buy the market on sale.” But she stayed in cash until the market had fully recovered. Only then, at the end of 2020, did she feel ready to invest.
At that point, I told her she needed a different advisor. She was surprised, but I explained: my job is to help clients make good decisions when it matters most. I had used every tool available to guide her, but if I couldn’t help her act during this downturn, I doubted I’d succeed in the next one. Taking her on as a client would have set her up for failure.
To satisfy my own curiosity (and my inner finance nerd), I tracked what would have happened if she had invested at various points. If she had invested the $1,000,000 in January 2020, she would have earned about $362,000 by year’s end. If she had invested at the March bottom—admittedly a tough call—her gains would have been over $716,000. Even waiting until July or September would have added more than $300,000 to her portfolio.
I don’t know what ultimately happened with her plan. I hope she found an advisor better able to support her. For me, the takeaway was clear: the cost of fear can be measured in hundreds of thousands of dollars. Good decision-making isn’t just important—it’s priceless.
