You Can’t Avoid Risk

Earlier this week, I ran across an interesting tool over on the Vanguard website. It’s embedded in an article called “The Truth About Risk” and it lets you tweak a model portfolio with sliders for stock, bonds, and cash.
The upshot is that you can’t avoid risk. You can attempt to minimize your exposure to it, but there will always be some level of risk associated with your investing activities.
With stocks, you’re facing the possibility of whipsaw performance with wonderfully high highs but dreadfully low lows. With bonds, the highs aren’t as high and the lows aren’t as low, but you’re still facing potentially large fluctuations. And with cash, even though you’ll be protected in a nominal sense, you risk losing out to inflation.
In inflation-adjusted terms…
An all-stock portfolio would have returned an average of 6.71% from 1926-2011 with gains in 56 out of 86 years. The best year would have been +53.41% and the worst year would have been -37.29%.
In contrast, an all-bond portfolio would have posted an average return of 2.49% over the same period with gains in 58 of 86 years. The best year would have been +27.73% and the worst year would have been -16.15%.
And finally, good old cash. An all-cash portfolio would have posted an average return of 0.63% with gains in 54 of 86 years. The best year would have been +12.52% and the worst year would have been -15.05% (gotta love that high inflation in the 70s).
The antidote? A well-diversified portfolio and time. As you can see from the graph below, the range of returns across rolling time periods shrinks dramatically as the period length increases.

In fact, once you get out to a 10 year timeframe, it’s rather unlikely that you’ll face a loss. Possible? Yes. But not likely. And if you do it won’t be very large.
Disclaimer: Discover is a paid advertiser of this site.
Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
Filed under: Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» Risk Tolerance vs. Risk Capacity» How is Your Risk Tolerance Holding Up?
» The Recovery Will Come From Those That Have Been Laid Off
» Banks May Rescue Defaulting Homeowners
» Avoiding the Baby Boomer Retirement Bust
» Lending Club High vs. Low Risk Loan Experiment Complete
» Lump Sum Investing vs. Dollar Cost Averaging
» Risk Happens
Was this article useful? Please sign up to receive our content via e-mail:
3 Responses to “You Can’t Avoid Risk”
Leave a Reply
Top Cards by Category
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
Bonus Miles: Earn 30,000 bonus miles toward Award Travel after you spend $500 on the Card within the first three months of Cardmembership. Earn As You Spend: Get 2X miles on Delta purchases and 1X miles for all other eligible dollars spent.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
Treat yourself to the gold standard of The Business Gold Rewards Card(R) from American Express OPEN which includes $0 introductory annual fee for the first year, then $175. This charge card can supercharge the way your business earns rewards with three times points on airfare purchased from airlines, two times points on purchases at US gas stations up to $100,000 in each category per year, then 1 point. Terms and limitations apply.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Reduced Credit Limits? Share Your Experience
- Ethanol Blended Gas = Lower Mileage?
- $15,000 Homebuyer Tax Credit
- Buying Furniture off the Back of a Truck
- Will Mac OS X Lion Kill Quicken 2007?
How to save money on insurance
- Can you afford an international retirement living?
- How to help your family after you are gone
- Will Social Security be gone before I retire?
- Refund, or no refund?
- This battle of the sexes has no winner
- What to look for when buying an energy-efficient home
- The hidden savings in a rent payment
- How to save money on vacations using social media and new technologies
- How to budget without regular paychecks
- What do you do with your windfalls?

March 1st, 2013 at 10:07 pm
You’re absolutely right – you can’t avoid risk. No matter we do, investing or otherwise, it carries some form of risk. With many things in daily life we make decisions on a subconscious level by taking into account the reward of the activity, but with investing we need to be much more conscious.
I think this is where a lot of people run into problems when managing their money. They often don’t fully weigh the risk factors and get blinded by the potential reward. When faced with the adversity (drawdown) that often comes with such high reward opportunities they panic and exit at the worst possible time.
So doing a clear accounting of the risk factors and coming to terms with them is an important early step in the investing process. Once you’ve done that it becomes much easier to define a good plan for your goals and to follow it long term.
March 4th, 2013 at 10:08 am
I think the biggest challenge for people isn’t necessarily the risk by itself its how that risk is mitigated over time. I don’t know many people that are willing to look at an investment in terms of decades though they really should.
Risk is a given.
March 4th, 2013 at 10:12 am
The above post shows not only the importance of diversification, but it also shows me that the re balancing of one’s portfolio periodically may even provide a better opportunity to avoid losses over time. Re balancing takes the emotion out of investing and causes one to buy low and sell high.