Why Playing It 'Safe' Is The Riskiest Move-Part 2
How to reframe 'RISK', stop confusing 'SAFE' with smart, plus a roadmap for Millennial investors to sleep at night while building wealth with confidence
NOTE: To do justice to the concept of Investment Risk, this post was divided in two parts, for ease of reading. This is Part 2.
Your free Personal Risk Framework building tool is at the end of this post. đ
You can find Part 1 here along with the free Essential Investment Terms glossary with plain English definitions and examples.
This post is part of a 3-articles series on the essential guardrails of your investments:
On Risk Tolerance (current post + Part 1 )
On Time Horizon
Part 2 covers:
Advanced Risk Concepts For Experienced Investors
Risk Mistakes Advisors See Constantly
Real-World Risk Scenarios: Beyond Market Drops
International Diversification: A Global Perspective on Risk
Building Your Personal Risk Framework + Your free tool
Conclusion: Embracing Risk Without Fear
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You can read more in our Why Playing It Small Costs You Wealth post about how learning about risk and building your framework to handle it is part of the idea that you can become a better investor.
Making money is a skill and it can be learned.
Risk is one cornerstone of the mental model you need.
Advanced Risk Concepts (For Experienced Investors)
If you've been investing for a few years, these concepts can refine your thinking:
Sequence of Returns Risk
It's not just about average returnsâit's about when you get them. Young investors should not be concerned about this, but getting poor returns early in retirement can devastate a portfolio, even if average returns are decent.
Solution: Consider bond tents or bucket strategies as you approach major withdrawals.
Factor Risk
The market isn't just "the market"âit's composed of factors like:
Value vs. Growth: Cheap stocks vs. expensive stocks
Size: Large companies vs. small companies
Momentum: Recent winners vs. recent losers
Quality: Profitable companies vs. unprofitable ones
Application: You can tilt your portfolio toward factors with higher expected returns (like value and small-cap), but be prepared for years when they underperform.
Correlation Risk
Diversification works until it doesn't. During crises, correlations spikeâeverything falls together.
Examples:
2008: Real estate, stocks, commodities all crashed
March 2020: Growth, value, international, bonds all fell initially
Different asset classes that normally zig-zag suddenly all zag
Solution: True diversification includes assets that respond to different economic conditionsâstocks for growth, bonds for deflation, real assets for inflation.
Tail Risk
The fat tail eventsâcrashes that "shouldn't" happen according to normal distributions but do anyway.
Examples: 1987 crash, 2008 financial crisis, March 2020 COVID crash
Solution: Position sizing, cash reserves, and avoiding (margin) leverage. You can't predict tail events, but you can survive them.
Risk Mistakes Advisors See Constantly
Mistake #1: Conflating Volatility with Risk for Long-Term Money
A 30-year-old putting retirement money in CDs because they're "safer" than stock funds. The volatility can be scary, but the inflation risk is the real beast. Remember the chart in Part 1.
Mistake #2: Taking Zero Risk with Decades-Long Time Horizons
Keeping a 40-year retirement timeline invested in savings accounts earning under 3% while inflation runs 3%+.
Mistake #3: Taking Too Much Risk with Short-Term Money
Investing next year's house down payment in growth stocks because "the market always goes up." It doesâeventually.
Mistake #4: Abandoning the Plan After Market Drops
Selling everything after a 20% decline, then watching from the sidelines as markets recover and reach new highs.
Mistake #5: Chasing Performance After Missing Gains
Rotating into whatever performed best last year, consistently buying high and selling low.
Mistake #6: Lifestyle Risk Creep
As income grows, increasing spending instead of saving. The biggest risk to wealth building isn't market crashesâit's never starting investing meaningful amounts because we overspend and under-save.
Real-World Risk Scenarios: Beyond Market Drops
Scenario 1: Job Loss During Market Downturn (2008-style)
Your portfolio is down 30%, and you lose your job. Without an emergency fund, you're forced to sell investments at the worst time.
Lesson: Emergency funds aren't about market crashesâthey're about life crashes. Have one in place to catch you.
Scenario 2: Health Crisis Requiring Early Portfolio Access
You need $50,000 for medical treatment, but it's all tied up in retirement accounts with penalties, or in investments that are currently down.
Lesson: Keep some money accessible outside of retirement accounts. Stuff happens.
Scenario 3: Inflation Spike (1970s-style)
Your "safe" bond portfolio gets crushed as interest rates rise. Your cash loses purchasing power rapidly.
Lesson: Different economic environments create different risks. Diversify across asset classes.
Scenario 4: Concentration Risk
Your employer's stock (where 40% of your net worth is invested) gets hit by a scandal and loses 60% in one day.
Lesson: Never let any single investmentâeven a "sure thing"âdominate your portfolio.
International Diversification: A Global Perspective on Risk
For millennial investors thinking globally, international diversification adds another layer:
Currency Risk
When you invest internationally, you're also betting on currency movements. A European stock could gain 10% in euros but you could lose money if the euro weakens against the dollar. Remember this is temporary. Reversion to the mean will take care of this âpaper lossâ given some time-align your investments with your time horizon.
Political Risk
Different countries have different regulatory environments, tax policies, and political stability. Things can change overnight.
Market Cycle Risk
U.S. markets don't always lead global markets. Sometimes international markets outperform for years at a time.
The Balance: International diversification reduces single-country risk but adds currency and political risk. For most investors, a mix (like 70% U.S., 30% international) balances these trade-offs.
Building Your Personal Risk Framework
Whether you're new to investing or have a few years under your belt, here's how to make peace with risk:
Step 1: Start with the First Cornerstone
Always ask: Risk to whom? Risk compared to what? Your risk isn't your neighbor's risk.
Step 2: Anchor on the Second Cornerstone
Clarify your ability, need, and willingnessâand notice when they're out of balance.
Step 3: Separate Risk from Volatility
Don't confuse short-term noise with long-term danger. One is temporary discomfort, the other is permanent erosion.
Step 4: Mind Your Behavior
Markets can't control your decisions, but your decisions can ruin your returns. Plan for your own psychology. Rule #1 in investing: Investor, know thyself!
Step 5: Build Your Risk Budget
Decide how much risk you can handle, then spend it wisely across different types of growth opportunities.
Step 6: Match Risk to Time Horizon
Use the 0-3 years, 3-10 years, 10+ years framework to guide your allocation decisions.
Step 7: Plan for Scenarios Beyond Market Drops
Emergency funds, liquidity needs, job changes, health eventsâlife risk often matters more than market risk.
Step 8: Accept Risk as Managed, Not Eliminated
Diversification, planning, and discipline don't erase risk, but they make it manageable.
Your free Personal Risk Framework building tool is below đ
Conclusion: Embracing Risk Without Fear
Risk is not one thing. It's a reality with many faces, from inflation to volatility to your own emotions. It can feel overwhelming, even unfair.
The good news: risk is always manageable.
For DIY investors, it can mean a diversified index portfolio, patience, and consistency. For those working with an advisor, it means building a portfolio calibrated to your ability, need, and willingnessâand adjusting as life changes.
Feelings will tempt you to retreat. But feelings aren't facts. Educate yourself, lean on time-tested strategies, and remember: time, returns, knowledge and experience will take the sting out of fear.
No one is born knowing how to invest. You learn. You practice. You get better. Money-care is self-care. Investing is a process of growthâyour money grows, and so do you. The tools are available, the strategies are proven, and the resources are endless.
Risk is the price of admission. But it's also the ticket to freedom, independence, and goals met.
Then the question for you is: How will you build your own system for living with riskâone that lets you grow, sleep at night, and reach the future you want?
Ready to build your Personal Risk Framework? Download the free companion tool below to turn these concepts into action đ
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You can find Part 1 of this article here.
Next Week: Investment Objectives. What Are They All About?
Thank you for reading,
Elizabeth
Wealth GPS
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