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Wise Money: Risk, Risk Everywhere

Wise Money Graphic - 10/2025

 

Quote to Ponder

"Choose the risks you are comfortable with, then diversify the hell out of them."

— Eugene Fama
 

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A note from KYLE MOORE, CFP®

Most people don't realize the risks they're taking.

There is no such thing as a risk-free financial decision.

Put your money in the stock market, and you accept the risk that prices fall.

Buy bonds, and you accept interest-rate and credit risk.

Hold cash, and you accept inflation risk.

Put the money under your mattress, and you haven't eliminated risk. You've simply chosen a different one.

Inflation is particularly dangerous because it doesn't feel dangerous.

There is no flashing red number on a screen. No breaking-news headline. No 20% decline that makes your stomach turn.

It is more like a slow leak in your wealth, quietly eroding your purchasing power year after year.

This leads to one of the most important ideas in investing:

You cannot avoid risk. You can only choose which risks you are willing to accept.

And what constitutes "risk" depends entirely on what you're trying to accomplish.

Imagine you're 90 years old, have more than enough money to last the rest of your life, and your primary goal is preserving what you have. Cash and high-quality bonds might be very safe investments.

Now imagine you're 30 with decades of retirement ahead of you, future college tuition to fund, and perhaps a home to buy.

A portfolio dominated by cash and bonds might feel safe.

But is it?

You have traded the visible volatility of stocks for the less visible risks of inflation and insufficient growth. Your account balance may bounce around less, but the risk of falling short of your goals could actually be higher.

Risk isn't defined by how much an investment moves. Risk is defined by what can prevent you from accomplishing your goals.

That's why every financial decision involves a tradeoff.

If you want more stability today, you may have to accept less purchasing power tomorrow.

If you want higher expected returns, you have to accept more uncertainty along the way.

If you concentrate your wealth in a single investment, you increase the possibility of an extraordinary outcome (and the possibility of a disastrous one).

If you diversify, you reduce the risk of disaster, but virtually guarantee that something you don't own will occasionally perform better than what you do.

There is always an opportunity cost. There is always another side of the decision.

Investing, then, isn't about avoiding risk.

It's about understanding risk, choosing it deliberately, and making sure the risks you take are worth taking.

That's also why we always start with your financial plan before we invest a dollar.

What is the money for?

When will you need it?

What could prevent you from getting there?

Only then can we ask: Which investments give you the best odds of success?

Eugene Fama, the godfather of much of our investment philosophy, once put it more colorfully:

"Choose the risks you are comfortable with, then diversify the hell out of them."

That's a pretty good description of what we're trying to do.

Once we've determined how much risk makes sense for your financial plan, we want to pursue the sources of expected return that we believe are worth taking (and diversify the hell out of them).

1. Stocks over bonds

"Equities are the only investment asset class that fully captures human ingenuity, rendering it into enduring wealth." — Nick Murray

Owning stocks means owning businesses. You participate in their innovation, productivity, profits, and growth. The price of admission is uncertainty. Stock prices can (and will) fall dramatically from time to time.

We think the long-term reward is worth enduring that uncertainty.

2. Small companies over large companies

Small companies are less established and more uncertain than their larger counterparts.

Investors should demand a higher expected return for bearing that additional risk.

We think that's a risk worth taking as long as it's broadly diversified.

3. Value companies over growth companies

The price you pay matters.

All else equal, paying a lower price relative to a company's fundamentals gives you a higher expected return.

But there's a reason those companies are cheap. They're often unloved, struggling, or facing uncertainty.

Again, the potential reward comes with a price.

4. Profitable companies over unprofitable companies

This one almost sounds like a no-brainer.

All else equal, a company that generates more profits from its assets is more attractive than one that generates less.

Small. Cheap. Profitable.

Not because these investments will outperform every year. They won't.

Not because they eliminate risk. They don't.

In fact, that's the whole point.

You can't eliminate risk.

The goal is to understand which risks you're taking, diversify the ones you can, avoid the ones that don't compensate you, and have the discipline to stick with the risks that do.

Because successful investing isn't about finding a world without risk.

It's about choosing your risks wisely.

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing contained in the material constitutes a recommendation for purchase or sale of any security, investment advisory services or tax advice. The information and opinions expressed in the linked articles are from third parties, and while they are deemed reliable, we cannot guarantee their accuracy
Kyle Moore CFP®
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