The Risk of Not Taking Enough Risk
Alex Purdom, CIM, PFP
Wealth Advisor, Associate Portfolio Manager at CIBC Wood Gundy
“Not being willing to take risks is an extremely risky strategy.”
-?????? Magnus Carlsen (Five-time world chess champion)
Somewhat counterintuitively, being too conservative is one of the costliest mistakes that an investor can make.
Take a look at the chart below. It shows the long-term returns of two different investments (treasury bills and stocks).
In the short-run conservative investments like treasury bills carry almost no risk. They come with a government promise to give your money back plus some interest.
In the long run, conservative investments like treasury bills carry the risk of opportunity cost - the potential forgone profit from a missed opportunity. As Magnus Carlsen tells us, this can be “extremely risky.”
The nature of compound interest means the cost of being too conservative increases over time.
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Over the last 25 years, stocks delivered 3.3x more than treasury bills.
Over the last 50 years, stocks delivered 18.1x more than treasury bills!
Does this mean that stocks are a panacea and all of your investments should be in things like the S&P 500?
Of course not. It means that you should have an investment plan in place that makes sense for you and your goals.
Want to talk about your plan?
-- Alex Purdom
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