Risk is an essential part of investing, and I want to say right off the bat that it is a GOOD THING! We’re conditioned to understand the word risk as a negative, because it’s usually associated with a loss of some kind, the opposite is true.
Risk is something you’re going to need to get to know about if you’re going to have any success in building wealth as a New Accumulator. In fact, not only are you going to need to get to know it, you’re going to need to embrace it.
Risk is Multi-Faceted
I’ve dealt with risk at several points along the MeaningfulMoney journey, and it takes many forms. When most people think about risk, they think in terms of investment risk, which in a nutshell is the risk that you’ll invest in something and lose money as a result. But it’s way more complicated than that.
Inflation risk is the risk that you’ll lose money by NOT investing, due to the ravages of inflation. Inertia risk is the risk that you’ll miss out by doing nothing, it’s kind of the technical term for #FOMO (fear of missing out).
There are many factors and many different risks which are just how life works. It really is everywhere, all the time, so rather than fear it, we just need to accept that it’s there. But more than that, we need to understand that we can use risk to our advantage – it’s a lever we can pull to make our own lives better in all kinds of ways.
From an investment standpoint, risk makes you richer, simple as that. The more risk you take with your investments, the higher the likely return. Of course, it also means that the risk of loss is higher, but as we’ll see that’s more about you than about the investments themselves.
So, there’s a lot to this idea of risk, but I think that for the purposes of your investing journey as a New Accumulators you can think about risk, when investing, as how much the investments you hold will fluctuate. I’m going to call that volatility because it serves our purposes. Generally speaking, more volatile investments end up making your money grow over the longer term but the ride can be rocky.