The Definition of Risk

May 2013

There are two basic forms of risk for investors:  (1) losing money via depreciating investments, and (2) running out of money. ... If your investments earn insufficient returns to make your nest egg last as long as you do, you’ll run out of money—so it is vitally important to understand that those investments that are perceived to have the least short-term volatility typically have the worst long-term returns.  What’s the difference between having no money because your investments depreciated and running out of money because your investments didn’t produce sufficient returns?  Not much.  Either way, you have no money.  However, while losing money with a diversified portfolio over the long term is indeed rare, losing your money through insufficient returns is much more common.