Managing portfolios and building financial plans has been my focus for nearly 15 years. A recurring concern I hear from clients is the perceived “risk” of the stock market—often amplified by dramatic headlines and personal experience during downturns.
Traditional finance defines risk through volatility, typically measured by standard deviation. Stocks might average an 8% return, but the path to that return can swing dramatically—from losses of 40% to gains of 50%. Understandably, this volatility feels risky, especially over short timeframes.
But is that the full picture? In my experience, no—it’s not. Risk is more nuanced than statistics suggest. Yes, stocks fluctuate more than bonds or cash, and if you need money next month, that volatility matters. But for long-term investors, the definition of risk shifts.
In personal finance, real risk often means not achieving your financial goals, running out of money in retirement, or losing purchasing power to inflation. When we take this broader view, the conversation around stocks changes dramatically.
Over long periods, equities have consistently outpaced inflation and outperformed “safe” assets. Cash and bonds may offer short-term stability, but their real (inflation-adjusted) returns are often low or even negative. So while your principal might be intact, its purchasing power erodes.
This is why an overly conservative portfolio—especially over decades—can actually be riskier than one with stock exposure. It may feel safer in the short term but leaves you vulnerable to failing your long-term goals.
So, when are stocks not risky? The answer lies in two key factors:
A Long-Term Horizon
If you don’t need to touch your invested capital for many years, the day-to-day market fluctuations matter less. Over time, the market’s general upward trend and the power of compounding smooth out short-term volatility and allow for recovery from downturns.
Sufficient Safe Assets for Current Needs
If your immediate living expenses and short-term spending are covered by stable, liquid assets—like cash, short-term bonds, or an emergency fund—the rest of your portfolio can afford to ride out market cycles.
In retirement, I often suggest keeping 3 to 5 years of income needs in safe assets. This buffer allows your stock investments time to recover during downturns without impacting your day-to-day lifestyle.
It’s also important to understand that you don’t need to pick individual stocks to benefit from the market’s long-term growth. Diversified investments such as ETFs or mutual funds provide broad market exposure, immediate diversification, and lower company-specific risk—without sacrificing growth potential.
Ultimately, the best portfolio aligns with your goals, risk tolerance, and time horizon. And while markets will always have ups and downs, a well-structured financial plan—with the right mix of growth and safety—can help you stay on track.
You don’t need to pick individual stocks to benefit from the market’s long-term growth
As always, working with a qualified, transparent financial advisor can help you build a strategy tailored to your unique needs—one that balances today’s income with tomorrow’s growth.
