You Can’t Outrun A Bear
Hi Sam,
It was a weekend afternoon with some time to spare, and we needed to find an activity. Actually, I would’ve been perfectly content reading a book on the back deck, but I guess that’s for a different season of life (wink to all my retired readers).
Instead, whenever there’s a quiet moment between the hours of 7 a.m. and 7 p.m., the conversation typically goes something like this:
“Dad, we can either go to the pool or ride bikes.”
Or, “Dad, what do you want to do? We can build a fort or walk to the creek.”
It’s always A or B, and somehow neither option ever involves a book on the back deck.
Well, this particular afternoon we chose option A from the choices presented, and shortly thereafter we were on a walk to the river just outside our neighborhood. Strapped with a couple of backpacks for contingencies and carrying a couple of fishing poles, we made it to our destination.
After about five minutes of fishing, I heard a grunt.
No, it wasn’t an animal. It was my wife, Emily.
She makes this really gruff sound when she’s scared, but this particular time it had a bit of a hushed tone to it. She made the sound a few times until I clued in and looked her way. She pointed to a black bear about 30 yards from us.
Sure enough, there it was. Maybe 150 pounds—not super big and far more interested in whatever it was eating on the other side of the river, directly across from us.
Because of its general preoccupation, the river between us, and the fact that, with our crew, it surely knew we were there long before we saw it, I wasn’t too worried. Heck, the bear may have even thought Emily was trying to communicate with it, adding to its calm demeanor.
After I assured Emily we were OK, we stood and watched for a few minutes until it eventually disappeared into the woods.
I share all of this because it seems like a good time for a reminder: you’re going to run into some bears on your journey.
I’m not talking about Virginia black bears. I’m talking about bear markets. Technically speaking, a bear market is a decline of 20% or more from a recent stock market high, often using the S&P 500 as the benchmark.
But that’s not the only critter out there. You have corrections—declines of 10% or more—and then you have recessions, which are broader, severe declines in economic activity that can bring even deeper challenges for markets and investors like the Great Financial Crisis of 2008-2009.
The point is, there’s a whole spectrum of scenarios where markets and the value of your investments can go down for a period of time.
These periods bring discomfort. Even though I wasn’t worried about the bear we met on our hike, it still got my blood pumping a little quicker than usual. But when it comes to investing, the impact of these events has less to do with the critter you meet and more to do with the situation you find yourself in when you meet it.
I was recently reading a fellow author and advisor’s book, and he was commenting on the difference between risk and volatility.
Volatility has to do with the up-and-down movement in the value of an asset. Your mutual fund in your 401(k) has volatility. The home you own has price volatility too—you just don’t have a daily reference for what someone is willing to pay for it. And no, your Zillow Estimate doesn’t count.
Volatility is the natural undulation that happens in a dynamic world like our stock market. Companies, economies, policies, and individual investors all make up this wild environment, constantly affecting the prices of the investments you own. As long as that environment remains tilted favorably toward profit-making over the long run, our investments tend to go up—but the ride getting there is full of peaks and valleys.
Risk, on the other hand, has less to do with the day-to-day movement of an investment as its often framed. Instead, risk is simply exposure to a range of possible outcomes both good and bad.
Going back to our black bear example, let’s say we found ourselves in a different situation that afternoon. Instead, we’ve got a momma bear—big, hormonal, and protective—and nearby is her cub. And rather than the river between us, we’re the ones standing between them.
There's a range of outcomes in this situation and we're unwilling to accept any of them. I’d be making my own version of the scared scream. Mine is higher-pitched and could probably be mistaken for a shrill laugh. Either way, we’re out of there!
So what does risk look like for an investor?
Let’s say you’re looking to buy a home and you’ve set aside money for the down payment. But instead of that money sitting in an FDIC-insured savings account, it’s invested in a handful of stocks you picked in your Robinhood account. When you finally find "the one," your down-payment money could be higher, lower or roughly the same.
Or you’re looking to retire next year and have a goal of reaching $2.5 million in your 401(k) before you officially make the transition. Instead of beginning to pivot your portfolio from saving to spending, you’re holding tight to an equity-heavy portfolio to reach your number. Just like the previous examples, those savings could be higher, lower or roughly the same.
Financial risk is created when the outcome of a situation can lead to failure of a goal. Volatility is simply the movement in the value of the things we own. Neither is inherently bad.
Bad risk is when we can't retire because savings have depreciated so significantly that the math doesn't work, even though this was the plan we told everyone, including our employer. And bad volatility is when we sell an investment because it's down 7% after the latest earnings call despite being "all-in" on it several months ago.
Risk and volatility is part of investing. They only become problematic when we can't deal with the consequences they bring.
And I’d take that one step further: the people we’re accountable to and responsible for need to be prepared to live with those consequences too.
The first step is understanding your exposure. That often requires another set of eyes to help see things as they really are. From there, you can make intentional decisions about which risks are worth taking and which ones aren’t. What types of investments to own and which ones you shouldn't.
You can’t make sure there are no bears in the woods.
But you can make sure you’re not standing between momma bear and her cub when one shows up.
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