A Comment on Risk

Risk is often misunderstood when discussing investing. Risk is the possibility that an objective won't be obtained. Investing, as Warren Buffet puts it, is the practice of foregoing consumption today in an attempt to allow greater consumption at a later date. Think of it as the opposite of Wimpy from Popeye - I forego a hamburger today so I can buy two hamburgers tomorrow.

By that standard, assumedly "risk-free" long-term treasury bonds are often much riskier than a long-term investment in common stocks (or stock funds). Even with very low inflation (as we have seen over the last decade) the purchasing power of government bonds erodes - especially when interest rates are low. As an example, in 2012 long-term treasury bonds decreased ones purchasing power through 2017. Note however, that on a very short time scale, say a day, week, month or even year, stocks will be riskier than short-term US bonds. But as soon as an investor's time horizon lengthens, a diversified stock portfolio becomes far less risky than bonds.

For most investors, those with longer time frames, investing in stocks is a less risky investment than one in bonds. This is a mistake made over and over again by even our most prestigious institutions like college endowments and pension funds.