Risk is Real – Opportunity Risk
What is risk? There are risks many create unknowingly. It is tempting to “preserve” your assets instead of seeking growth based on a goal. Investors often make the mistake of selecting investments they consider to be conservative as they seek to preserve wealth. Common “low risk” solutions include cash, CD’s and bonds. These all have a place, but not in an investment portfolio I could recommend.
The first of five risks in this series is “Opportunity Cost.” This is the fear of market volatility and this can cost the investor dearly. Investors often buy bonds or bond ETFs to replace their stock or stock ETF holdings. They think cash and bonds are less risky. If you have at least a ten-year investment horizon, then you are missing an opportunity and that will cost you. Opportunity cost is cumulative. If you have a couple of years of low returns in cash or bonds, you will never regain the missed opportunity without some serious and foolish risk-taking in later years.
Look at it this way: if you can average 8-10% returns by ignoring market volatility your growth over time will be significant. If you transition to “safe” investments that give you 3-5% returns, you will never regain the returns you “avoided” by steering clear of more volatile investments like stocks, stock ETFs and stock-based index mutual funds.
Read this to gain even more understanding: http://www.finra.org/investors/reality-investment-risk