Have you ever gotten a speeding ticket?
Well, when I was 17 and first had my license, I got two tickets in the same week! Once I figured out how those speed limit signs worked, I was in much better shape, but it took a wake-up call, aka large fines, to get my attention.
The same way driving faster increases hazards, a higher level of portfolio risk can be hazardous to your wealth. One of the most important factors is the measurement of downside risk.
Being too aggressive can be problematic, but those who are too conservative are also taking a lot of risk.
It seems contradictory that too conservative a portfolio could actually be risky, but think about this:
Let's say an investor needs to make his portfolio last until he leaves earth. He decides to be "safe" and invest it all in CDs with low interest. After inflation and taxes, he is actually losing money most years, as the price of goods like food, energy and household items goes up in value, and his purchasing power goes down. By being too conservative and not getting a high enough rate of return, he could actually run out of money before he dies.
Listen to today's podcast to learn more!
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