In the fourth quarter of 2024, the Global Markets, as defined by the MSCI All Country World Index, declined 0.30%* in U.S. Dollar terms. For the full year 2024, this same index posted a gain of 18.03%*.

For the S&P 500 Index, the year was led by the Communications Services, Financial and Consumer Discretionary sectors. While underperforming sectors for the year were Healthcare, Materials and Energy.

RISK

As we reflect on another year of positive market performance, it’s worth pausing to revisit a concept that underpins all investment decisions: risk. How we define, evaluate, and manage risk can greatly influence our success as investors, especially as markets reach new heights.

What is risk?

Merriam-Webster’s dictionary would define risk as:

         1. Possibility of loss or injury : Peril.

         2. Someone or something that creates or suggests a hazard.

         3. The chance that an investment (such as a stock or commodity) will lose value.

When it comes to investing, simply put, I believe risk is the possibility of permanent loss of capital.

When most individuals think of risk in investing, they think of a decline in the price of a security, even if it is temporary. This can be thought of as volatility to the downside – when a price moves upwards that is also technically considered volatility, albeit to the upside – I digress.

Volatility itself is not risk. Volatility can be an indicator of the presence of risk, or a symptom, but volatility is not risk itself. How much a stock or the overall market price falls or rises is not risk. Howard Marks puts it succinctly:

“Risk is the possibility that from the range of uncertain outcomes, an unfavorable one will materialize.”

Risk is not quantifiable in advance and is a matter of opinion. Risk is also counterintuitive. Risk is low when investors behave prudently and high when they don’t. Risk is perverse, in that the more a stock rises in price the greater the risk, and the more a stock goes down in price, the less the risk. During euphoric periods in the market, as asset prices climb higher, investors may perceive less risk, but in reality, the risk often grows. Conversely, after prices fall and fear dominates, the perceived risk is high, but the actual risk is often lower.

“It’s only when the tide goes out that we find out who’s been swimming naked.”

– Warren Buffett

So how do we manage risk, when we know high-quality companies do not always perform well, and low-quality companies do not always perform poorly? The answer lies in the price you pay.

You can buy the best company in the world, but if you overpay, it’s still a risky investment. On the other hand, a lower-quality asset can be a great investment if you buy it at the right price, allowing for the possibility of greater upside potential than potential loss – as we know, the market can often be either over-optimistic or over-pessimistic, and rarely lies rationally in between.

Focus on value. It’s not about finding the best companies – it’s about finding good companies at the right price. Price matters.

On another note, there is also the risk of not taking enough risk. If you avoid most risk in investing, you may end up with a return that is insufficient, after inflation and taxation, to support your cost of living (loss of real purchasing power overtime). Not having any losers in investing is not a useful goal. The only sure way to achieve that is by not taking any risk. Risk avoidance is likely to result in return avoidance. Most of us understand this intellectually, but human nature makes it hard for many to accept the idea that the willingness to live with some losses is an essential ingredient in investment success.

“You miss 100% of the shots you don’t take.”— Wayne Gretzky

At the end of the day, risk is an unavoidable part of investing. You can’t completely avoid it, but you can manage it. That means constantly evaluating the risk in the portfolio, staying prepared for unexpected events, and focusing on opportunities where the upside outweighs the downside.

“Risk means more things can happen than will happen.”— Elroy Dimson

Here's to embracing both the opportunities and challenges that come with risk as we head into a new year. 

Ted Velikonja, CIM®, FCSI

Velikonja Financial

We can be reached at

Email: connor.velikonja@cibc.com

Phone: 519 660-3759