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Is Playing it Safe Too Risky?

Based on our current market environment, and conversations we are having with clients, I view this particular topic in two different ways: (1) from a life perspective and (2) from an investing perspective.

This all comes from the fact that whether you are a pre-retiree or already retired, it was a lot easier to take your foot off the gas years ago, so to speak, and understand that you might be shifting your portfolio, thus becoming more conservative and risk averse. But times have changed. 

Taking on Additional Risk

Today, with high inflation and low bond yields, the conversations we’re having with clients is more like, “Do we need to take on additional risk to ward off longevity risk and other factors in your portfolio, other than diversification and helping you play defense?” My opinion is it is prudent to take on some additional risk with stocks in the portfolio now.

We’ve seen a lot of people quitting their jobs and a lot of new businesses getting started. If you look back, when a lot of big mainstream companies got started, it was after a difficult time in the market, socially, politically, and so on, so I think we are seeing some disgruntled people in their current situations trying to put things back into perspective.

Playing it too safe is too risky because you could potentially be leaving a lot on the table.

I know what you might be thinking: a financial advisor asking, “Is playing it safe too risky?” It probably sounds pretty “toppy,” right? Are we at the top here? What’s going on? I get it. There is both a life element and an investing element that I will explain.

The Life Element: For Change and Innovation

There is no shortage of quotes and stories about how risk takers are the ones who make dramatic differences in the world. Whether it’s Christopher Columbus, sailing across the ocean; Martin Luther King, Jr., standing up for what he believed in at a time when it was extremely risky to do so, or an entrepreneur starting a business, like Elon Musk, in modern times.

Taking enormous risks can lead to enormous rewards when conditions are right. Of course, it can also wipe you out if you’re wrong. However, many of the success stories we celebrate are some combination of hard work, intelligence, luck, and all of those things mixed together. There are tens of thousands of people that have tried and failed. Unfortunately, we don’t get to hear their stories.

One of my favorite success stories is when Elon Musk was down to his last one hundred million. He said he could put it all on Tesla, and then SpaceX would fail and die; he could put it all on SpaceX, and then Tesla would fail and die, or he could split it and run the risk they both fail and die. So he split it. Perhaps I should mention that past performance is no guarantee of future results before I remind you Tesla is one of the biggest companies in the world today, and SpaceX is changing the way we think about space travel.

I really admire someone that is comfortable taking that amount of risk because I know I am not that person. People like Elon Musk make a difference.They change the world in that way, which is why I am glad there are people like him who are willing to take huge, but calculated risks. They are the true creators of progress and innovation.

The Investing Element: Controlling the Risk

Time horizon is everything for investors. What I referred to earlier about your facing a tougher decision today than in the past centers on how much offense and defense you should have in your portfolio. With inflation currently at a 31-year high, stocks are more attractive. Bond yields, on the other hand, are low and less attractive.

I will not decry 60/40 portfolios regardless of the many articles and stories written over the years about the death of this allocation. Here is what I will ask: “If you are 65 years old, do you want half of your portfolio in bonds, knowing that you could live another 30+ years?” Sometimes, the real option is to accept more risk and volatility in your portfolio.

You could say “mathematically and statistically it works in your favor to have 90 percent in stocks.” But you know what? That’s a whole different ball game than when you’re thinking about the volatility that comes along with it. The numbers are not the hard part; managing your emotions is.

It’s important to realize there is no such thing as a perfect portfolio. Sure, today’s portfolio construction boils down to each individual’s time horizon, but also their willingness to take risk, their need to take risk and their ability to take risk. Every person, every situation, is different. That includes your age, your stage in life, your circumstances, all of those things that are very important in the decision-making process and that I deal with every day.

We have clients with large portfolios that enjoy comfortable lifestyles with virtually zero risk of ever running out of money. They have the ability to take on more risk, but they don’t need to. And they don’t want to. So, they play it safe. When you’ve already won the game you don’t have a lot of incentive to take on any more risk. 

We all don’t have to go out and start businesses, or try to change the world, or purposely put ourselves in incredibly risky situations. However, what I think we can do is adopt a mindset of continually challenging ourselves, setting new goals, trying new things, and getting outside of our comfort zones to learn, grow and become a better person. That is the takeaway from a life perspective because playing too safe is risky.

If you would like more information, or if have questions or concerns, please contact me at Hefren-Tillotson today. I would be happy to help.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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