The Catch-22 of Risk - By Peter Geckeler
The definition of a Catch-22 is, “A problematic situation for which the only solution is denied by a circumstance inherent in the problem or by a rule.” If you have ever experienced a “Catch-22” situation, you know how frustrating this concept can be. One of the most difficult investing principles that we as advisors must explain to our clients is the specific Catch-22 associated with investment risk.
Here is the Catch-22 of risk: For every investment risk we attempt to avoid, we inherently take on another form of risk. I recently attended a conference where the speaker referenced this reality in a unique way. He used a giant set of playing cards (the cards were almost my height!), and on one side of the cards he stated the benefit of avoiding a certain type of risk, and on the other side was the “risk” associated with this benefit.
I will give you a couple of examples:
1) John comes into our office stating that he wants to invest his money in a way that is safe from any market fluctuations. The Catch-22 risk of this safety from market fluctuations is inflation risk, which is John’s money may not keep up with inflation because of the lack of potential for growth.
2) Judy on the other hand reinforces that she wants an investment that is safe from current taxes; however, the “flip side” of avoiding current taxes is the increased risk associated with future taxation.
The goal of this “Catch-22 Conversation” is to remind each client that there is no such thing as a risk-free investment. Rather, only the informed acceptance of risk in order to accomplish the things that are most important to him or her.
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