“Risk is not volatility. Risk is the permanent loss of capital.”
This simple yet profound distinction by Howard Marks reshapes how we think about risk management. Many people conflate risk with short-term price swings—volatility—but true risk is far more consequential.
The Misconception of Risk as Volatility
The stock market goes up and down daily. Headlines scream about market crashes, corrections, and wild swings. Many investors panic when they see red numbers, fearing they’ve taken on too much “risk.” But volatility is just noise—a temporary fluctuation that doesn’t necessarily reflect the underlying value of an investment.
Real risk isn’t about price movements—it’s about decisions that can’t be undone, mistakes that wipe you out, or bets so large that recovery becomes impossible.
Risk Management
Risk management is about serially avoiding decisions that cannot be easily reversed whose downside would demolish you and prevent recovery.
This means:
1. Avoiding One-Way Doors – Some decisions are irreversible. Taking on excessive leverage, making a career-ending bet, or investing everything in a single speculative asset can leave no path for recovery.
2. Surviving First, Thriving Later – The most successful investors and businesses prioritise survival above all else. If you’re still in the game, you have a chance to win.
3. Margin of Safety – Always leave room for error. The future is uncertain, and overconfidence is often the root of catastrophic losses.
Practical Applications
In Investing:
- Diversify – Avoid concentrated bets that could ruin you.
- Limit Leverage – Debt magnifies gains but can also cause total destruction.
- Think Long-Term – Short-term volatility is irrelevant if the underlying investment is sound.
In Business & Life:
- Avoid Binary Outcomes – Don’t stake everything on a single make-or-break decision.
- Preserve Optionality – Keep flexibility to adapt when things go wrong.
- Know Your Breaking Point – If a loss would force you out of the game, don’t take the bet.
Conclusion
Risk isn’t about temporary ups and downs—it’s about permanent damage. True risk management means avoiding unrecoverable mistakes, staying in the game, and making decisions that allow for second chances.
The best way to grow rich is to first ensure you don’t go broke.
How can a financial planner help you?
Risk is not market swings. The real danger? Decisions that can’t be undone—like taking on too much debt, chasing speculative bets, or failing to plan for the unexpected. In financial planning, we don’t just chase returns. We focus on avoiding irreversible mistakes, so you can grow wealth without risking what you can’t afford to lose.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
