Noise gets more attention than silence, however what is quiet can sometimes be dangerous to ignore

Stock market volatility attracts a lot of attention in the news, which causes some people to believe that such fluctuations are the only retirement preparation risk.

In reality, there are other risks that are worse. Here’s the lowdown… When scared investors reduce volatility risk (i.e. reduce or get out of stocks), other risks increase… inflation and longevity risk. Inflation risk is about rising prices, if your savings value isn’t also rising. Longevity risk is when your money lives a shorter life than you do (running out of money).

People don’t often worry about inflation risk, because it usually happens slowly and gradually. However, this “invisible enemy” can do a lot of harm over time. As an example, the worst stock market drop in the U.S. happened during the Great Depression, as the S&P 500 Index fell 84% from top to bottom over roughly 4 years. The Global Financial Crisis crash was not as bad, but still tough, dropping 55.2%, just a few years ago. Inflation can’t be that bad, right? Wrong. Between 1971 and 2002 inflation was 79%. And, over the last 3 decades, inflation has been lower than the long-term averages, but on a cumulative basis still added up to 55%.

Here’s the irony… stock market volatility is more visible, but is the only risk that has a benefit over the long-run. Holding too much cash or bonds increases purchasing power risk, and longevity risk. And, people age 35 and younger, because they experienced the Global Financial Crisis at a young age, tend to be overly concerned about volatility risk, while unknowingly ignoring the other risks above. Choose your risks wisely, and be a disciplined investor, consistent with your life stage (see the WealthStep investment advice module) and take smart and appropriate risks that have a reward over time.