MDNews - Minnesota

Focus on Risk Tolerance Is Volatility When the markets collapsed in 2008, investors were really scared — probably more scared than they were in 2001 or even 1987 because the drop was so hard and so sudden. The media seemed to report on virtually every nuance, every little data point. I think 2008 changed an entire generation's perception of risk. Risk for this generation of investors became more visceral and much more emotional than ever before. What they were really afraid of was the possibility of a permanent loss. Risk and Volatility "R isk tolerance" is an important concept for physicians to understand. Because the 2008 collapse was so drastic, it challenged everyone's definition of what risk is. Many investors exited the market from fear. The financial industry likes to define risk as volatility or variability. We do this, I believe, because volatility is relatively easy to measure or quantify. The data available for volatility is clean and efficient and helps make the decision making process easier. No matter how good or bad that data looks, advisors need to understand that life tends to get in the way (we saw this in 2008). While volatility is quantifiable and a great tool as an indicator of risk or riskiness, it falls short of providing a true definition of investment risk. I don't think many investors fear volatility; what they fear is the possibility of permanent loss. When we measure risk tolerance, what we are generally measuring is an investor's ability to withstand volatility. Permanent loss is a very different concept from volatility. Volatility only becomes a permanent loss due to one of two reasons: (1) the loss is guaranteed Risk versus Reward: Rethinking Risk By Bill Strand Bill Strand, Founder and Principal of Paradigm: Strategies in Wealth Management, LLC ++++++++++++++++++++++++++++++ + +++ + +++ ++++++++++++++++++++++++++++++ WEALTH MANAGEMENT 1 0 | Minnesota MD NEWS ■ M D N E W S . CO M

• Cover