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Happy Wednesday!
Last week I wrote about Thelma & Louise.
Guess I’m continuing the movie references with the title of this week’s letter, Everything Everywhere All At Once.
It’s an interesting, relatively low-budget independent film that won over many film critics from the start. In fact, it won best picture at the most recent Oscars along with awards for some its cast.
But enough about movies…
This idea of “everything everywhere all at once” applies nicely, if you ask me, to the topic of RISK.
I’ve written about risk before:
Today, I’d like to share some additional perspective.
Risk, in the context of your portfolio and financial plan, isn’t one-dimensional.
Most people, if asked, would likely describe financial risk as the potential for their investment portfolio to drop in value, yet that only addresses one of the many personal financial risks you may face now or in the future.
Also technically, the description above is really more about volatility which many people often conflate with risk.
And volatility in the context of investments and your portfolio is actually a feature and not a bug. It’s one of the reasons we’re afforded higher returns over time if, and only if, we can just be patient and experience the wonders of compound returns over time.
But in addition to investment price volatility which we’ll call a risk, there’s also:
Things get more expensive over time, so you need to make sure your money is keeping up with or outpacing the long-term rate of inflation. Otherwise the ability of your money to purchase the same goods and services will severely get eroded over time.
Credit risk
If you lend your money to someone, you need to be confident they’ll pay you back. That’s why I only use and recommend US Treasury bonds as they’re about the lowest credit risk available for fixed income.
Liquidity risk
You need to make sure you can access and utilize your money when you need to. This is why illiquid investments like private equity, many insurance products, or others are problematic and to be avoided in most cases
Systematic risk
This is the risk inherent with investing overall, and it cannot be completely avoided or diversified away. On the contrary, unsystematic risk is associated with individual investment securities and types and it can be greatly reduced through diversification. So make sure you’re truly diversifed!
Which will run out first, your money or your blood pressure? Many people I speak with share a concern about running out of money. One way to address this risk is making sure your financial plan is based on you living longer than average (unless you have family or medical history that would indicate otherwise)
Cashflow risk
Are you saving enough? What if you’re saving too much? Too much or too little spending? While many people would benefit from saving more, there is a point at which some people can save too much. Or spend too little. While this may appear to be a “first world problem” it’s still a very real risk that could impact your one and only life. And lifestyle.
Investment risk
My perspective on investment risk is a little different than yours might be… I believe you need to take enough risk with your investments to provide a reasonable degree of comfort and confidence in your financial plan, and not a drop more. Full stop. This is quite different from many advisors and firms that attempt to quantify how much investment risk you can tolerate only to build a portfolio that exposes your investments (and you) to your maximum risk threshhold. Seems backwards to me…
Do you have the right types of insurance? Are you over- or under-insured? Are you treating insurance like an investment or retirement plan? I believe in insurance for specific purposes which is why I have life, disability, liability, home, auto, and other policies. I do not believe insurance is a cure-all for any financial concern or need as many insurance salesmen seem to think. And act.
But if risk is “everything everywhere all at once” then surely risk exists outside our money decisions, right?
Indeed it does…
Other risks include:
Relationship risk
Are you investing time, energy, and attention in destructive relationships? And likewise, do you need to work more on relationships that really matter to you?
Information risk
What are you consuming? What has your attention? Is it influencing your thoughts, decisions, emotions, and behavior?
Are you suffering through a career that’s draining the life out of you one hour at a time? Or are you in a role where you’re always worried if you’ll still have a job next week?
Related: "If you're succeeding at a job you hate, imagine how good you'd be at a job you loved."
Time risk
Are you spending too much time on non-productive or counter-productive pursuits? For example, are you worrying - or maybe even obsessing - about things over which you have little if any control?
In the interest of time - and your attention span - let me wrap up by saying that risk is a part of life.
It’s all around us.
Every day.
Everywhere.
We accept many risks simply as a part of our daily existence, while others we let stress us out and cause constant anxiety.
You have a choice…
You can choose to be paralyzed by risk and other flavors of uncertainty we’re all faced with every day, or you can make a plan based on the things you can control while more or less letting go of all the things outside your control.
It’s a choice I hope you’ll make while keeping your eyes focused squarely on the goal of making the most of your one and only shot at life.
Thoughts?
Any risks I overlooked?
Hit reply and let me know.
Links & things
Gus the disruptor
Earlier this month, Elizabeth and I temp fostered a yellow lab named Gus. And while we’ve fostered dogs and puppies before, it’s been a little while. He’s a great dog, and I’m confident he’ll soon find a wonderful forever home, but talk about shaking up our daily routine! Of course, we all came through it just fine including our dog Winnie. What have you done recently to disrupt your routine?
Planning vs predicting
Much of the financial world is populated by prognosticators, soothsayers, and others in the business of attempting to predict what’s going to happen. It makes for interesting TV and “news” articles, but it’s not a good foundation on which to make your financial decisions. In my nearly 30 years of experience, I believe (and practice):
It’s always better to plan than to predict
Your true net worth
According to this article from David Booth of Dimensional Fund Advisors, it’s about much more than just money. It’s worth a read:
Thank You!
I’m grateful to have you as a reader.
If you have any questions or an idea for a future newsletter, blog post, or YouTube video, I'd love your input.
Just hit reply - I read (and truly appreciate) every email you send.
Until next Wednesday,
Russ
*some links and references from older articles & letters might no longer be working