The terms risk and security are heard a lot when discussing money. Most people think of risk as the value of money going up or down, and usually down coming to mind when associated with risk. Security may be thought of as the ability to spend on things important to you, what those important things are to you, and how they will change over time.
However, these two are competing concepts when taken alone. What typically is lacking is structure.
For example, when you have “a number” in mind, you’ll never be secure! $1,000,000 – does this mean if it goes to $900,000 you won’t be happy anymore? How did it go down 10%? Was that $100,000 spent (so you should be happy)? Or was it “the risk” that caused it to go down (so you would be unhappy)? Worrying about losing it takes away security!
Fear is an emotion that erodes security and something is needed to “turn on the light,” or enlighten, you to overcome fear. This comes from structure to base security on what money you have can do for you … measured by your needs and desires, not those of someone else.
Thoughts of the market falling (risk), and how far it might fall, are vertical representations of risk … value going up and down. However, real risk is horizontal! How long are you able to ride out market fluctuations (and they will always happen), until markets are back to usual?* Have you ever heard the phrase “stocks are for the long run?” Really – any investing and saving for retirement is for the long run. How long is that? For the rest of your life!
When markets “misbehave” (fall), how long does your money need to last and what is the structure to manage money, so it not only lasts through the misbehavior, but longer than you do? Can you answer these questions for you? You need a structure to weather storms and to meet your everyday needs for as long as you live.
Money needs to last the duration of your life in retirement. But there’s another element of retirement planning. A different kind of structure. Many say that retirement is the longest stage of your life. The paradox of leisure (retirement) is the question of “where’s your break” from it? While you’re working, the weekend breaks that up so you can get away from things. How do you get away from retirement? Volunteering? Part time work?
Security comes from having a structure in place … a plan and process … that is tailored to you and takes into consideration risks.
Moral of the story: What most people lack in their financial lives is structure.
*Bernstein distinguishes between Shallow Risk vs Deep Risk. Either may be considered horizontal in nature, Shallow being temporary and Deep being permanent. Deep risk typically occurs by spending money (that’s permanent – you’ve given to someone else!), or getting out of markets when they’re down … i.e., turning shallow into deep.
PS. A deeper dive into financial risk management is summarized here …
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