Risk Defined | AWM Insights #76 | Erik Averill, Justin Dyer | AWM Insights #76 - a podcast by AWM Capital

Risk might be the most used word in finance. We hear it all the time, but many have no idea how to define or quantify it. 

The reality is that “risk” is an umbrella term with different types of risk folded underneath it. Though many will define risk in terms of tolerance, looking at it this way can stifle your long-term growth opportunities. Instead, it can be better to view risk as the permanent loss of money.

How should you view risk in the framework of this definition?

In this episode, Erik and Justin define risk, and more importantly discuss how you should view it within the context of your life priorities. 

EPISODE HIGHLIGHTS

• 1:04 News you should know: China purchases a 1% stake in TikTok’s parent company, and TikTok was the most downloaded app last year. Adidas sells Reebok to Authentic Brands, which owns Sports Illustrated and the licensing rights to Shaq’s name, image, and likeness.
• 3:03 Amazon continues to disrupt the market by opening good old fashioned department stores.
• 4:26 True risk is the permanent loss of money that you can’t use in the future to achieve your life priorities. This definition is different from how risk is traditionally defined by advisors.
• 5:06 Most of the financial world will define risk in terms of tolerance; can you sleep at night when markets go down? This measure of risk can stifle performance by keeping people from investing in assets that have higher growth over the long-term.
• 6:29 Risk and return are related. If I expect to earn more, I should also expect to take on more risk.
• 8:43 Risk also encompasses regulatory decisions. Governments can make decisions that permanently affect industries; cryptocurrency being a great example.
• 10:38 If you’re taking a concentrated risk in an individual stock or cryptocurrency, you better get compensated for it. Does my return justify my risk? 
• 13:00 You can cherry-pick examples of individual stocks that have performed very well over the past decade, but what are the true odds of you finding the needle in the haystack? What’s the cost of picking the wrong one?
• 16:39 Your life priorities should inform your investment allocation. Essential needs should be invested conservatively, while long-term priorities can be invested more aggressively.
• 19:45 Liquidity risk is a measure of how easily you can have access to your money. You should demand a premium or higher return on investments that are less liquid. Investments that are less liquid pose an additional risk, which you should be compensated for.
• 22:14 Risk is unpredictable, we know events like 2008 can happen, but we certainly don’t know when they will happen. Having a protective reserve that includes your spending needs is essential. This is how you prepare for risk. 
• 22:42 Sitting on the sidelines and not participating in the stock market is also a risk. You risk not capturing returns that will outpace inflation. 

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