When you invest, losing money is not the only risk you will encounter. The other issue is underperforming the market. And if this happens, you will eventually have less money to retire on.
In response to a podcast I co-host, a listener wrote in to say that risk is not about the risk of losing money. Rather, the listener said, it is the risk of your expected return not being achieved, regardless of whether you lose money or not.
This is a great point and totally true. Sure, we worry a great deal about losing money. It keeps us awake at night. But if our money is growing at a rate below inflation or below the average market returns over an extended period of time, then we’re becoming poorer. While that’s not as bad as losing our money, it does have a very pronounced and negative impact on our investments and ultimately on our ability to retire (assuming retirement is the end game of investing).
I have often written that we need to make sure that we hold the majority of our investment in exchange-traded funds (ETFs) as this ensures we’ll get market returns. Over the long term the market returns the best growth of any asset class. Holding a core of at least 50% in ETFs reduces the risk of returns not meeting expectations.
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