The Choice is Yours

As an investor, you get to choose how much you might lose to a stock market decline.  You cannot choose how much you might make in a stock market surge.  While nobody can guarantee gains, you may guarantee against stock market losses.  For a simple example, you cannot lose in the stock market if you don’t invest in the stock market.  Therefore, you can choose not to lose.  However, if you invest in the stock market then you cannot predict how much you may gain.

You can assure no stock market losses.  You cannot assure stock market gains.  This is not debatable , but simply truth.  So what’s the point you may be thinking?  In decision-making of any kind, there should be a cost/benefit or a risk/reward analysis.  All of us make decisions every day with potential loss or gain.  Going over the speed limit, overindulging in food or drink, and countless others.  We consider “is it worth it”?  Is the juice worth the squeeze?

Applying this to your wealth is the point of this article.  Taking investment risk makes common sense for most of us when we are younger.  The typical purpose for taking risk when you are younger is to grow your wealth long-term and be able to leave employment living the lifestyle you desire from your investments.  This is your money’s purpose while working; to grow.  You are accepting the risk of short-term losses which historically have always bounced back.  In the long-term, the stock market has been what some call a “sure bet”.  Starting out, you really don’t have much money to lose anyway!  This is a risk/reward tradeoff most everyone is happy to make for decades (aged 20s through 50s and beyond sometimes).

Now let’s apply risk/reward logic to another scenario in your life.  You are in or near retirement.  The “reward” or objective you are seeking is not likely to be added growth over 20-30 years.  In retirement, a primary objective would be lifestyle without having to be employed.  If you choose to work, then great!  Having to work, and choosing to work, are very different feelings.

Is lifestyle enjoyment during retirement more important to you than passing on your wealth as inheritance?  If yes, then your lifestyle is primarily supported by income not by growth.  Many income strategies have substantially less investment risk than growth strategies.  If the purpose for your money is income for lifestyle, then you are likely better served by taking less risk not more risk.  Taking more investment risk when income is your objective, puts your objective (lifestyle) in potential jeopardy.  If you benefit from choosing higher investment risk, the “reward” is typically not more lifestyle…but more inheritance!

You cannot take your wealth with you when you die.  You want your wealth to serve what you want.  Assisting families in viewing money as a means to their ends, is one of my challenges as an advisor.  Habits are hard to let go of.  Growing money for 3-4 decades for the purpose of accumulation is ultimately so you can spend that money in retirement without having to work.  Money is only ink on paper until you exchange it for something you value.  What you value are the “ends” you seek.  Money is a means to your ends.  All the rules and your objectives change in retirement.  Your strategies should adjust accordingly.

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