![\"Risk\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/02\/risk.jpg\")
<\/p>\nI believe most people spend too much of their lives trying to reduce perceived financial risk.<\/p>\n
The opportunity cost of this approach is very high and puts lifestyle goals at risk.<\/p>\n
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Many people buy a home and then focus on repaying debt.<\/p>\n
They then upgrade their home and once again, focus on repaying debt.<\/p>\n
This cycle often results in a significant portion of their lives being dedicated to risk mitigation through a focus on debt repayment.<\/p>\n
While repaying debt is not inherently wrong, the issue lies in adopting a mindset characterised by a limited tolerance for risk, which may not be beneficial in the long run.<\/p>\n
More specifically, perhaps the mistake is to focus on debt repayment at the expense of considering alternative and additional investments.<\/p>\n
Becoming comfortable with perceived risk is almost always a better approach.<\/p>\n
Safety and security are basic human needs.<\/p>\n
Uncertainty makes most people feel uncomfortable.<\/p>\n
These things drive people to aim to achieve at least a basic level of financial security. \r\n
However, the ultimate goal for most people is to have control over how they spend their time.<\/p>\n
To work as much as they want, not because they need<\/em>\u00a0to work.<\/p>\n These are all very common financial and lifestyle goals that most people would like to achieve without taking unacceptable high risks.<\/p>\n Most individuals realise that all they need to do is earn an average return over a long period to fulfil their financial goals.<\/p>\n They don\u2019t need to aim for 20% p.a. returns.<\/p>\n For instance, an investment yielding 7.2% p.a. will, on average, double in value every 10 years.<\/p>\n Consequently, the investment\u2019s value will quadruple over a 20-year span, which is generally sufficient for most people to meet their goals.<\/p>\n Consequently, I believe that the\u00a0risk profile\u00a0for most individuals is quite similar.<\/p>\n In essence, most people are comfortable minimising as much risk as possible to achieve an average return over the long term.<\/p>\n Put differently, few are inclined to take exceedingly high risks for the sake of pursuing unrealistically high returns.<\/p>\n Investment risk can be defined as the probability of not attaining the intended investment return.<\/p>\n This can happen for two primary reasons.<\/p>\n Firstly, it might be due to an erroneous investment choice \u2013 a low-quality investment lacking the necessary attributes for reaching the desired returns.<\/p>\n Secondly, the inherent fluctuations in the market can result in your investment not yet yielding the expected returns at a particular point in time.<\/p>\n Investment mistakes are not the result of chance; they are always foreseeable.<\/p>\n By adhering to an evidence-based and rules-based approach in your investment strategy, the likelihood of making mistakes becomes highly unlikely.<\/p>\n While volatility is a natural occurrence, it\u2019s crucial to acknowledge that, when the investment fundamentals remain robust, volatility is merely about timing.<\/p>\n Take the stock market for instance, which statistically exhibits high volatility.<\/p>\n Approximately 95% of the time, annual returns from the stock market fluctuate between a 30% loss and a 50% gain.<\/p>\n This wide range is a perfect example of the inherent volatility of stock markets.<\/p>\n However, over extended periods spanning multiple decades, returns tend to follow a relatively predictable pattern.<\/p>\n Holding an index fund for 30 years or more may expose you to numerous market cycles, yet returns are likely to revert to the mean, averaging around 10% p.a.<\/p>\n Risk mitigation becomes relevant primarily when there\u2019s a need to prematurely interrupt your investment strategy before it completes its intended course.<\/p>\n For instance, if you find yourself compelled to sell your share portfolio after just 5 years of ownership, you could potentially incur a loss.<\/p>\n However, it\u2019s important to note that such occurrences are uncommon.<\/p>\n If we set aside scenarios where external factors require you to interrupt your investment strategy, the relevance of volatility diminishes.<\/p>\n The year-to-year fluctuations in returns become inconsequential if the overall returns over a period of 20+ years, for example, are sufficient to meet your financial goals.<\/p>\n Perceived risk frequently stems from a lack of knowledge.Risk is only a problem if you need to interrupt your strategy<\/span><\/h2>\n
![\"Business](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/01\/property-puzzle-800x534.jpg\")
<\/p>\nIt is education, not risk<\/span><\/h2>\n
![\"Strategy\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/06\/Strategy-800x452.jpg\")
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