When I was younger, my calculus for risk in my outdoor pursuits was pretty straightforward.
Could this kill me? If so, how likely is that outcome?
Could this seriously injure me? If so, how likely is that outcome?
Risk assessment complete. Boom. Done.
If I felt comfortable with the answers to those questions, I was good to go. As a young man, I was confident and bold in my ability to assess the dangers and overlay my skills and limitations — and, if I’m honest, probably a little bit stupid. Fortunately, I am still alive and have never suffered any serious injuries from those pursuits. It’s true what they say: sometimes it’s better to be lucky than good.
Now that I’m older — and at least a little wiser — my calculus for risk has changed significantly. I still enjoy many of the same pursuits, but my physical limitations are greater, and the consequences of an undesired outcome feel heavier. Recovery takes longer. Injuries linger. Responsibilities are different. I still participate, but my risk assessment process is more nuanced and a lot less bold.
Interestingly, I see our investment risk tolerance follow a very similar trajectory as we age.
When retirement is a distant concept somewhere beyond the horizon, risk feels abstract. A downturn is inconvenient, but it’s temporary. As long as you have time on your side, the math tends to work itself out. But as retirement begins to come into view — and as our accumulated savings represent decades of disciplined effort — something shifts. We begin to recognize that we now have a lot more to lose.
Even the biggest risk takers eventually understand that, at some point, protection begins to matter more than growth.
As we age, our most valuable commodity is not the balance in our retirement accounts — it is time. If your retirement portfolio takes a 40% to 60% hit while you’re in your 30s or 40s, it’s painful but survivable. You have years, maybe decades, to recover. But that same hit in your 50s or 60s can be devastating, primarily because of the time required to recoup those losses.
After a major setback, your account must earn back every dollar it lost before it can begin compounding again. And if you are already in retirement and withdrawing funds, the recovery becomes even more difficult because growth must occur from a smaller earning base. In some cases, you may never fully regain what was lost.
If you are in that window where retirement is visible on the horizon, it makes sense to reevaluate your risk tolerance. The calculus changes. What once felt bold and appropriate may no longer be wise.
Time is our most precious asset. Plan your investment strategy accordingly.
Bill Overton is a financial advisor with Advanced Financial Solutions in Idaho.