Investing has risks. But what is risk in relation to a portfolio? There doesn't seem to be a single answer to what risk really is. Risk depends on the situation. The risk you see, and the risk I see, are different based on our investing standards, financial situation and goals.
Investing in net nets is risky to most people. Investing in small caps is also risky to many. In fact, my friends claim that investing in the stock market is a huge and risky gamble. But one thing is for sure. Volatility is not a risk.
Let's say you had to choose between a volatile stock and a stable stock, which would you prefer to hold? Subconsciously, you answered the "stable" one. However, have you considered what a stable stock offers in terms of profit potential? While a stable stock will match what the market does, market beating stocks have a higher measure of volatility because it sometimes produces killer returns, which obviously has to move faster than the market. Thus a higher beta, which in Wall Street terms is a volatile stock.
A couple of years back, I talked with a friend about a particular company which went something like this.
Lanber: "Hey this looks like a great buying opportunity for this great business."
Friend: "What's the beta?"
Lanber: ??….. "No idea."
We never talked about investments after that 20 second conversation.
If volatility is important for people to keep an eye on, then here's an example of why crazy high beta is better. From Tesla's (NASDAQ:TSLA) IPO to the end of 2012, the stock returned 81% compared to the market's 42.6%. Look at that volatility. This is a roller coaster chart. If you owned Tesla and checked the price movement on a daily basis, you would have thrown up multiple times.
Market Beating Volatility
However, here's the end result. The volatility from the above image is all but gone.
What Could Happen if You Don't Check Your Portfolio Often. Sure this is an amplified example, but this is what happens.
Here's the Real Risk to Your Portfolio
I'm willing to bet that you do not invest simply to sleep on a huge amount of money. You invest to increase wealth, which will in turn increase your purchasing power later on. So here's the real long term risk.
The probability of losing purchasing power over time.
Your money needs to earn at least 3-4% annual returns after taxes to break even. Otherwise, it's losing value. I'm not talking about a single year, because we all have bad years.
One topic that isn't discussed often is the reason for investing. Rather than get rich, the goal I have as an investor is to enjoy life and help people by increasing my purchasing power. Right now, markets are at all time highs and it's a fool's game to try and time the market. To achieve your goals and to eliminate that pesky risk lurking around your portfolio, ignore what the market is doing. Just keep a consistent approach to finding, analyzing and valuing stocks. You'll be sure to beat inflation.