Myth: Risk Goes Down With Time.
In the investment industry (and even the financial planning industry), you hear over and over that risk declines over time. To make this claim, people parade around with one of the most used sales pieces in the industry: a chart showing that, over time, the range of returns (on a percentage basis) narrow to the long-term average of around 10%.
When you look at one year periods in the stock market, it looks like a really wild ride ranging from +60% to -50%, but then over time, the range of returns settles around this long-term average.
When we are measuring RETURNS in percent, and if we assume risk is defined as the potential range of outcomes, indeed “risk” decreases over time.
The great irony is that REAL PEOPLE do not CARE about the RETURN they get. They care about the WEALTH they have to fund their family’s most important goals, and when we measure risk in terms of WEALTH, risk goes up over time.
Let’s say you start with a $1 million inheritance when you are 50. Where you end up in 30 years could range from over $50 MILLION to BROKE depending on the returns you get, the order you get them, and the timing of your withdrawals to fund your LIFE.
The entire discussion about RETURNS ignores the reality that REAL PEOPLE have lives. No one gets the average annual rate of return, and if they did, they wouldn’t care if they didn’t have enough to fund their goals. Getting a certain “target rate of return” is not a financial goal. Having the WEALTH to fund LIFE is a financial goal!
Stay tuned for more on the “Wealth Management Paradox.”