NEWS & ANNOUNCEMENTS What really is risk? 3 September 2020

Viewing risk through that lens – and assuming you still had the will to live - you would probably come away thinking that cash is ‘low’ risk and equities are ‘high’ risk. Yet when you sit down with a good financial planner, they will be talking to you about a higher level of goals, such as living without worrying about money and having the freedom to do what you want, when you want. Risk, when looked at through this lens, should mean anything that makes attaining this goal less certain. In this context, cash may well become the ‘risky’ asset and equities the ‘safe’ asset.

Here’s why: in a great little book titled Deep Risk by William Bernstein - a neurologist, a pilot and financial author – he separates risk into two key types: ‘shallow’ risk, which relates to the non-permanent, although sometimes extended, fall in asset value; and ‘deep’ risk which is the permanent loss of capital, through inflation, deflation, confiscation or destruction.

If we avoid assets with uncertain short-term outcomes (diversified equities) in favour of those with more certain outcomes (cash deposits), we risk trading ‘shallow’ risk for ‘deep’ risk.

Take a look at the chart below, which illustrates the likely permanent erosion of purchasing power of cash deposits, as a consequence of moderate inflation but low interest rates that we have experienced since the Global Financial Crisis in 2007-9.

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