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Risk
by WealthEffect Staff
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Risk is volatility — or so the professors say
 
  In the stock market, volatility is good!  
  True risk is the permanent loss of money  
 
1.

If you look in an investment textbook, risk is defined as volatility. For example, a stock which tends to rise or fall more than the average stock is considered riskier. There is even a quantitative measure of this risk, known as beta.

This concept of risk is based on the Efficient Market Theory, which states that you can't do better than the average stock over time unless you accept more volatility in your portfolio.

 
 
2.

Unfortunately for professors (but fortunately for investors), the stock market is not efficient — you can outperform it. As for beta, well, that's pretty much irrelevant.

In fact, volatility is an investor's friend. A significant price decline in the shares of a great company gives you an opportunity to buy more. A significant short-term price increase gives tax-exempt investors the opportunity (but not the obligation!) to sell.

You can take advantage of the situation or ignore it — your choice. Either way, you can rely upon the stock price to eventually reflect the underlying value (which keeps rising over the years).

 
 
3.

To an investor, risk is the possibility of losing money permanently. This kind of risk matters.

The WealthEffect Strategy protects against this risk. Because you own great companies and are willing to put time on your side, you can welcome volatility without the fear that the price will never come back. This peace of mind might seem unimportant in a bull market, but things have been known to change.

To see the Impact of Taxes chart, click here.

Suggestion: Go to Let's Get Real