Risk vs. Volatility: Long Term Stock Market Returns
Recently, we received the following email from a user:
This is not really a support question, but rather a general observation. First, I should say that I am a subscriber, and I find the service to be useful, and the observations to be astute. Nevertheless, I have the same comment on your service that I have about most of the financial industry, and that is this: you treat the words “risk” and “volatility” as though they were synonyms. But they are not. The only relevant “risk” for a retirement investor is that he (or she, of course) runs out of money before he dies. Volatility is only risky, in the long run, if you chicken out in a bear market and sell. By choosing assets during the accrual years that are uncorrelated, you absolutely guarantee yourself a lower return than you would have gotten by simply holding the asset class with the highest rate of return. This is a mathematical certainty. As you approach retirement, you do, of course, need sufficient liquidity to ensure that you will not need to sell assets at depressed prices. However, for younger investors, why should there be any allocation at all to less volatile investments, if their return is lower? Certainly, this calls for a level of investor education which is sorely lacking – but shouldn’t that be the job of an investor service such as yours? By conflating the terms “volatility” and “risk”, you play into the fears of uneducated investors, who should be embracing volatility as the best friend of the long term investor at a young age.
Just a thought.
Please login or register an account to view the newsletter