The concepts of risk and uncertainty are often mistakenly intertwined across financial media and across the financial services industry. The difference between the two, however, cannot be more drastic. Uncertainty falls in the category of “anything is possible” and it quite literally encompasses all possible scenarios that could occur that are simultaneously very difficult, or unnecessary, to plan for. For example, the possibility of waking up tomorrow and learning that a particular government has been overthrown by its military remains above 0%. It is a true uncertainty that has the capability of producing short-term volatility across global equity markets (i.e., geopolitical risk). In fact, we can likely make an argument that the possibility of anything happening is above 0%, which may give rise to uncertainty and fear (likely fueled by emotional factors). Preparing your investment portfolio for uncertainty and fear, however, is not a rational approach to long-term success because uncertainty around various events will always be evident, irrespective of the economic cycle and irrespective of the equity market cycle. Our approach to investment management is focused on the risks surrounding your unique financial plan, because risks are likely plannable. Inflation risk, longevity risk, early mortality risk, employment risk, and portfolio downside risk are just a few of the risks that matter relative to the numerous uncertainties that will always have the possibility of materializing.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Source: CX Institutional, registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.