Underrated Uncertainty

When it comes to financial planning and investing (and life), risk management is, understandably, a big focus. We often talk about risk capacity, risk tolerance, and risk-reward tradeoffs. As you’ve heard me say, the pandemic was a years-long learning lab into our own risk-reward sensibilities, and like me, you may have noticed that everyone had a different calculation as to what risk was worth which benefit. Risk can mean volatility (the degree and frequency of ups and downs) as well as uncertainty (Will Silicon Valley Bank fail? When will the Fed start lowering interest rates?). But David Booth, Founder and Chair of Dimensional Fund Advisors, asks us to reconsider uncertainty. Maybe it plays a useful, or even essential, role. What are the risks we can “manage” away and which must be borne? And if they must be borne, how do we do that successfully over the long term, so that we achieve the desired investment (and life) outcomes?  Give this short essay from Dimensional Funds a quick read, see what you think, and let us know.