What Is Risk, Really?

John Noonan Uncategorized

It Comes From Within


The boring, formal and – frankly – useless answer to the question: Risk is the probability or likelihood of occurrence of losses relative to the expected return on any particular investment blah, blah, blah…who cares? Wake us when it’s over.

Sure, we care about risk. After all, it’s one-third of any investment, along with cost and return. But that definition doesn’t get to the heart of the issue.

Every day there’s a probability that we lose money that day. But no one’s panicking over that.

Until, in the midst of our busy lives, that probability is brought to our attention.

How so? Events. Now, it’s Chinese tariffs. Then, it was Brexit, Y2K, any war, the Bird Flu, the JFK assassination, Black Monday, the Savings & Loans crisis, the Dot-com bubble,  the 70’s energy crisis, Greece, any political turmoil, Hyper-inflation, De-flation, Any-flation, when they cancelled the “A-Team” (that one still hurts). The list is endless. And they all reminded us that we can lose money that day.

But it’s not the events themselves that matter; rather, it’s our anticipation of and/or reaction to them. What we do in either case is driven by fear – fear of losing money, and what effects that will have on our lives. Fear, our friends, is risk.

Fear can ruin the most prudent of plans, deconstruct the soundest portfolio. Fear is why so many investors fail.

So how do we defeat fear? With information. Fear is an emotion, and in investing, an irrational one. We know this because the data, science, research and mathematics of investing tell a whole different story than what fear perpetrates. All of that information tells us that the severity of, and market reaction to, these events is completely unpredictable; that focusing on the long-term, rather than what’s happening now, has always worked; that this time is NEVER different, no matter what your reasoning is; that patience and discipline are the keys to success.

Even without digging deep into this information (who really wants to read academic papers, mathematical proofs, and endless streams of data?), it’s not hard to accept our reasoning. Just think back to any of those events we mentioned. We carry the memories of them with a tenth of the gravity they held when they were current. All have passed, and the markets have roared higher. Yet a prediction of such fortune, at the time, would have seemed incredulous, no?

That’s because it’s never different. Nor is the answer. Although the events vary, the fear is the same. But patience and discipline always win.


John & Bill