This article was first published in the Globe and Mail on November 2, 2024. It is being republished with permission.

by Tom Bradley

Of all the opportunities and risks that investors face, U.S. politics seems to elicit the strongest views, and most intense emotion. Many investors believe the coming election is a huge risk to their portfolio. Depending on their point of view, their net worth is going to take a hit when Harris or Trump wins.

I’m not going to wade into the election discourse, but rather use this moment in time to discuss the most misunderstood term in investing — risk. I’ll start by discussing what’s not risk.

Risk isn’t what the media is obsessing about. Yes, an election, or looming announcement from the U.S. Federal Reserve, is an uncertainty, but it isn’t a risk to your portfolio. That’s because it’s in plain view and has been factored into exchange rates, bond yields and stock prices. The market is like an oddsmaker. It doesn’t always get the call right, but rest assured, it hasn’t overlooked the issue.

Carl Richards, a financial planner and author, makes the point this way, “Risk is what’s left over after you think you’ve thought of everything.” The risks (and opportunities) that are going to move markets are not yet in the headlines and may not be receiving coverage at all.

While the election is getting all the attention, there is a myriad of other market forces working away in the shadows. For instance, yields rose in recent weeks, supposedly owing to inflationary policies of the candidates, but there were other important factors at play, including stronger-than-expected economic data.

And while macro mavens puzzle over polls and campaign promises, companies keep growing, innovating, and allocating capital to where they find the best opportunities. If the U.S. becomes less desirable to invest in after Nov. 5, management will turn their focus to other parts of the world that will be more desirable.

Risk also isn’t market volatility. It’s ridiculous how much attention the market’s zigs and zags get (and even more ridiculous that measures of volatility are the main input in most risk-management models). Think about it. One day, declining interest rates are good for stocks because lower financing costs will boost profits and encourage deal making. The next day, lower rates indicate the economy is weak and we’re heading into recession.

A sports analogy is illustrative here. On his way to scoring 69 goals last season, Auston Matthews was held scoreless in 36 games (out of 82). Four times he failed to score for a week or more (he was twice blanked for four games in a row, and twice for three games). Is it a risk when the market indexes drop 3 per cent in a week on their way to providing a 9-per-cent annual return over 10 years?

The biggest reason risk is hard to understand, however, is that it’s personal. It’s different for everyone. It depends on your background, personality, financial circumstances, and stage of life. As I heard it described this week at a GMO conference, “Risk is not having what you need, when you need it.”

If you’re a long-term investor who is building wealth for retirement, urgent headlines and short-term volatility are irrelevant. Even longer periods of market weakness have little consequence for your future wealth. Risk for you, given your time frame, is failing to achieve a long-term return that meets your retirement goals (perhaps caused by not taking enough risk).

Alternatively, if you’re retired and drawing an income from your portfolio, extended market declines are a factor and must be managed. Market slumps can’t be predicted so you need to have secure sources of income to weather the storm. Your risk is being forced to draw on your long-term assets before they’ve had time to recover.

There’s a risk that I haven’t mentioned — permanent loss of capital as it applies to buying individual securities or pursuing specific themes. I’ve left it out because portfolios that are diversified across different industries, geographies, and asset types (cash, bonds, stocks, real estate) don’t face this risk. They don’t avoid market downturns but nor do they miss upside surprises. As a result, they’re assured of recovering to new highs. The only uncertainty is how long it will take.

So, before you assume that what others are concerned about is relevant to you, assess it against your goals, time frame, and portfolio. It may make watching the results on Nov. 5 a tiny bit less stressful.