Straight Talk

Risk gets no respect these days

Should long-term investors worry about the recent volatility?
Should long-term investors worry about the recent volatility?

Years of record-breaking stock market highs may have led the average investor to forget it, but assessing—and accepting—risk is an inherent element of any long-term investment strategy. What goes up, up, up must eventually come, at least temporarily, a bit down. And it's good thing to be reminded of that, even as the latest swings in valuations make investors with shorter-term memories sweat.

Don Bayley | E+ | Getty Images

Certified financial planner Mark Cortazzo, founder of and senior partner at MACRO Consulting Group, notes that as far back as the 1920s the market has seen corrections of 20 percent or more about once every three years on average. By contrast, today's investors haven't seen a correction of at least 10 percent since 2012. Financial advisors worth their salt should make sure their clients aware of that history from the get-go, he said.

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If an advisor's clients are now calling to ask what's going on, and what they should do, then they weren't properly educated when the advisor first put together their financial plans. Accounting for risk "absolutely should be part of your expectation, that this volatility is going to happen many times if you're a long-term investor," Cortazzo said.

Too many people—say, those nearer retirement age—are now pushing the risk factor by being overly invested in equities, in an attempt to make up for lost time and lost gains. "They're almost being forced to, because we are in such a low-interest rate environment and they need some growth," Cortazzo said. "You do have people that are cheating and sneaking out a little bit further on the risk spectrum than they should be."

A long period of record growth might have encouraged such behavior but recent volatility sends a timely reminder that risk demands respect. In this Straight Talk video, Cortazzo lays it on the line.

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