When most people hear the word risk in investing, their first thought is loss.
Will I lose money?
Will the market crash?
Did I invest at the wrong time?
Those are understandable questions, but they don’t fully capture what risk actually means in the context of wise financial planning.
A better and more practical question is this:
Will I have the money I need, when I need it, for the life God has entrusted to me?
Markets rise and fall. Returns fluctuate. None of us knows what the next month, quarter, or year will bring. What turns uncertainty into danger is failing to understand how different types of risk interact with your goals, timeline, and decisions.
At Palo Seco Wealth Management, we believe risk should not be feared or ignored. It should be clearly understood, thoughtfully managed, and aligned with faithful stewardship.
In the investment world, risk is the possibility that an investment’s actual return will differ from what was expected, including the possibility of losing some or all of the money invested.
Advisors often substitute the word volatility for risk. Volatility measures how much an investment’s value moves up and down. While useful, volatility alone misses the heart of the issue.
No one complains when their account goes up 20 percent. What people care about is when it goes down 20 percent, especially if that decline threatens retirement income, generosity goals, or financial security.
True risk is not about short-term movement. It is about whether your strategy exposes you to outcomes that could prevent you from meeting your goals when it matters most.
A helpful way to understand risk is to divide it into two broad categories:
Market risk refers to broad, economy-wide forces that affect nearly all investments and cannot be diversified away.
Inflation risk
Inflation quietly erodes purchasing power over time. Even when portfolios grow, rising costs can reduce what that money can actually buy, making inflation one of the most serious long-term risks for retirees.
Interest rate risk
Changes in interest rates directly impact bond prices and indirectly influence stock valuations by altering borrowing costs and the value of future cash flows.
Reinvestment risk
When bonds, CDs, or other fixed-income investments mature, investors may be forced to reinvest at lower rates, reducing income and compounding long-term challenges.
Currency risk
Exchange rate movements affect companies that operate internationally. A stronger dollar can hurt exporters, while a weaker dollar can increase import costs.
Macro and geopolitical shocks
Events such as pandemics, wars, tariffs, or major policy shifts can move markets rapidly and unexpectedly.
Why this matters: market risk is unavoidable. The solution is not to eliminate it, but to design a plan resilient enough to endure downturns without forcing panic-driven decisions.
Diversifiable risks are specific to individual companies, industries, strategies, or structures. Unlike market risk, these risks can often be reduced through diversification, oversight, and discipline.
Business risk
Companies face operational challenges, competition, and changing consumer behavior. Poor execution can negatively impact returns.
Financial or leverage risk
Highly leveraged companies can amplify gains, but they also magnify losses when conditions deteriorate.
Credit or default risk
Borrowers may fail to meet debt obligations, affecting lenders and bondholders.
Political and regulatory risk
Changes in laws or regulations can materially impact certain industries or investment structures.
Investment manager risk
Active strategies depend on human decision-making. Style drift, inconsistency, or misaligned incentives can undermine results.
Liquidity and marketability risk
Some investments cannot be sold quickly or at fair value, particularly during periods of market stress.
Tax risk
Taxes are one of the largest drags on long-term returns. Changes in tax law or inefficient planning can significantly alter outcomes.
Why this matters: thoughtful portfolio construction and ongoing review can meaningfully reduce these risks and improve long-term durability.
The principle of diversification is not new.
Nearly 3,000 years ago, King Solomon wrote, “Divide your investments among many places, for you do not know what risks might lie ahead.” This timeless insight acknowledges uncertainty while encouraging wisdom and prudence.
Solomon’s life also offers an important reminder: wisdom must be applied consistently. Knowledge alone does not protect wealth. Careful stewardship, humility, and discipline over time are what preserve it.
One of the most common mistakes investors make is assuming risk is universal. In reality, risk is deeply personal and must be evaluated in light of your specific circumstances.
This is your capacity to withstand loss. If a significant decline would force you to change your lifestyle, delay retirement, or abandon important goals, the portfolio may be taking more risk than you can afford, regardless of potential returns.
Many investors believe they are risk-tolerant until they experience a 20–30 percent decline. If volatility leads to anxiety and reactive decisions, the portfolio is misaligned with the investor.
Every goal needs a timeframe. Money needed in the next few years should not be invested the same way as assets intended for long-term growth.
Planning based on averages is dangerous. Wise planning assumes the possibility of living longer than expected and ensures income, growth, and flexibility can last decades.
This risk is especially dangerous near and during retirement. Poor returns early in retirement, combined with withdrawals, can permanently impair a portfolio, even if long-term averages appear reasonable.
Two investors with identical average returns can experience dramatically different outcomes based solely on when gains and losses occur.
Not all threats come from markets. Lawsuits, inadequate legal structures, disability, long-term care needs, and insufficient insurance can undo years of progress if left unaddressed.
Scripture consistently affirms wisdom, counsel, and preparation. Faith-based investing is not about avoiding uncertainty. It is about approaching uncertainty with humility, discipline, and foresight.
Wise stewardship does not chase maximum returns. It seeks clarity, sustainability, and faithfulness over time.
Risk is unavoidable. Unmanaged risk is dangerous.
When understood properly, risk becomes a tool, not a threat. The goal is not to eliminate risk, but to:
At Palo Seco Wealth Management, we help Christian families approach risk with clarity, intention, and purpose so their financial decisions support the life they are called to live.
951-790-3861
brian@palosecowealthmanagement.com
2648 Cold Springs Ln., Corona, CA 92882
