Finding the Real Losses
Most often the time that people view their investments to be ‘at risk’ is when markets have endured a temporary correction. Of course unless you need all or most of your money in the short term it really isn’t risk at all. It is just our latest experience with what is termed volatility. Rising markets can be just as volatile but mysteriously nobody seems to notice.
Unfortunately volatility has been the definition of risk and the focus of the press and the financial services industry for a long time. They want you to believe that volatility is risk. That way you will continuously be making changes and buying more products that generate revenue for everyone but you.
Volatility can be a danger in another way too. It prevents us from properly assessing the other risks that are more significant. It becomes much harder to focus on your real risk which is ‘loss of capital’ risk. This is the possibility that you will permanently lose the money you invest. Lost capital cannot be replaced. It occurs from a number of risks such as currency risk, liquidity risk, market timing risk, taxation risk, quality risk, concentration risk, and inflation risk.
Attempting to time the market to miss the inevitable corrections is not the game you should be engaged in. Trying to ‘fix things’ by constantly changing your strategy is a guaranteed recipe for poor performance. This thinking usually amounts to losses somewhere in the 3-5% per year range over the long run. That would be a big loss. That would be a real loss.
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