Why Managing Risk May Be the Key to Financial Survival

When people talk about reaching their investment goals, a lot of times they focus on what rate of return they can achieve.  But I think this is misguided – because the rate of return that you get is often just luck (either good OR bad). What you should focus on instead is risk management: minimizing the damage of unforeseen events. 

Carl Richards at the New York Times stated once that “Risk is what’s left over after you think you’ve thought of everything.” And it’s true. 

When you get right down to it, the riskiest things in life are the events you never see coming. Which is why most people are really bad at dealing with it. The level of risk of just about anything is almost entirely dependent on how prepared you are to handle it. Big events that are well-prepared for can often pass without much problem. But something those events arrive out of thin air, big or small, and can have devastating consequences. 

That’s a great lesson when it comes to saving and investing. There are future economic risks out there that no one yet knows about, they’re not talking about them, so they’re not prepared for them; and because of that, the damage will probably be amplified when they happen. 

What past events turned out to be the biggest risks? Let’s see: the pandemic of 2020, the collapse of Lehman Brothers, 9/11, the OPEC embargo of 1973, Pearl Harbor, the Great Depression – in each case, the number of people who predicted these events rounds down to ZERO. 

They turned into disasters because nobody talked about them ahead of time, so no one was prepared, which meant that people could only react to them, often by panicking – and that’s when things tend to turn really bad. 

Someone once said that you should look at risk the way California looks at an earthquake. Californians know a big earthquake is coming, they just don’t know when or where or how big. So the residents have survival packs, extra insurance, and they design their buildings to withstand a quake that may not come for another century or more. No one debates the wisdom of that. It’s about survival. 

This is why we manage financial risk with a Bucket Strategy. We don’t know what the next market-rattling event will be, and we don’t know when it will happen – we only know THAT it will happen. So we prepare for it by setting aside non-volatile assets that provide us with several years of cash flow that won’t be interrupted by market volatility. Our goal is to minimize any damage to your nest egg and your ability to provide cash flow for yourself in retirement. 

When you’re young, building wealth over the long term often requires taking risks, swinging for the fences, and staying optimistic no matter what. But you have time on your side so the market downturns don’t have to hurt. But keeping that wealth when you’re older requires defensive thinking, short-term pessimism, and the ability to survive the disasters.  Remember, what worked for you during your accumulation phase of life can turn around and bite you during the distribution years. A risk management strategy – a Bucket strategy – is designed with that in mind. 

At Lucia Capital Group, we’ve been designing investment strategies for our clients for decades. How can we help you the most? Let’s talk.