How We Define Risk


The potential of losing money by investing in the stock market has become front and center over the past several weeks. The decline in the S&P 500 index and the bigger drops in other indexes and stocks has drawn attention. It has also led to the usual chatter about what the downside volatility means and whether investors should be concerned.

At AAII, we believe there is too much focus on the short-term swings in stock prices. Yes, downward moves in stock prices are not enjoyable. They can inflict psychological pain and lead to temporary decreases in wealth. But price volatility is not how we define risk.

Rather, as our founder James Cloonan wrote in “Investing at Level3” (AAII, 2017), “Risk is the likelihood that when we must withdraw assets from our portfolio for consumption, they will have a lower value than we could reasonably expect based on our investment strategy.” It is the chance of losing all or a significant enough percentage of portfolio value to the extent that the wealth cannot be recovered.

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Highlights from this month’s AAII Journal

AAII Sentiment Survey

Optimism rebounded strongly from an unusually low level but remains below average. Plus, this week’s special question asked AAII members what actions they took, if any, in response to the market’s increased volatility. More about this week’s results.
This week’s results:
  • Bullish: 37.9%, up 10.0 points
  • Neutral: 27.6%, down 3.4 points
  • Bearish: 34.5%, down 6.5 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%
Take the Sentiment Survey.

AAII Asset Allocation Survey

Bond and bond fund allocations fell to their lowest level since 2008. Also, in response to last month’s special question, three-fifths of respondents describe themselves as being overweight in stocks relative to their age. More about the latest results.

October AAII Asset Allocation Survey results:

  • Stocks and stock funds: 69.5%, down 0.4 percentage points
  • Bonds and bond funds: 13.3%, down 0.9 percentage points
  • Cash: 17.2%, up 1.3 percentage points
October AAII Asset Allocation Details:
  • Stocks: 32.2%, down 1.7 percentage points
  • Stock funds: 37.3%, up 1.3 percentage points
  • Bonds: 2.6%, down 0.1 percentage points
  • Bond funds: 10.7%, down 0.7 percentage points

Take the Asset Allocation Survey.

What’s Trending on AAII

  1. Using Beneficiary-Directed Trusts to Protect Your Heirs
  2. Well-Built 529 Plans Can Be a Great Option for College Savings
  3. Companies Surpassing Industry Norms

The Week Ahead

Earnings season will remain busy with 73 members of the S&P 500 scheduled to report their third-quarter results. Included in this group is Dow Jones industrial average component Walt Disney Co. (DIS), which will report on Thursday.

The Federal Open Market Committee (FOMC) will hold a one-day meeting on Wednesday. Interest rates are expected to be left unchanged. Currently, the CME’s FedWatch is assigning an approximate 70% chance of a 0.25% increase being announced at the December meeting.

Elsewhere on next week’s economic calendar, the October Institute for Supply Management (ISM) non-manufacturing index will be released on Monday. Tuesday will bring the September JOLTS report. Friday will feature the October producer price index (PPI) and the University of Michigan’s preliminary November consumer sentiment survey.

Four Federal Reserve officials will make public appearances: New York president John Williams on Monday and Friday, Dallas president Robert Kaplan on Monday and Philadelphia president Patrick Harker and Fed vice chairman Randal Quarles on Friday.

The Treasury Department will auction $37 billion of three-year notes on Monday, $27 billion of 10-year notes on Tuesday and $19 billion of 30-year bonds on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

Upcoming Meetings »


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