By Ranga Srinivasan and Ramprasad Satagopan
As financial advisors in Cupertino, CA, Everest Private Wealth strives to provide guidance and education on wealth management matters. We hope this article sheds some light on your questions and concerns.
When clients think about risk, the conversation often starts — and ends — with volatility. But risk in investing is far more nuanced than the daily swings you see in your portfolio. Understanding the different forms risk can take is the first step toward building a portfolio that can weather a wide range of market environments. In this article, we walk through the key risks every investor should be aware of, and the strategies we use at Everest to address them.
1. Permanent Loss of Capital
This is the risk that truly matters most: the permanent, unrecoverable loss of your investment. It is different from a temporary decline in market value. The primary culprit is idiosyncratic risk — the concentration of too much wealth in a single company, sector, or asset.
We have seen this play out time and again with technology employees holding large positions in their employer’s stock. When that single name experiences distress, the damage to household wealth can be severe and lasting. The solution is disciplined diversification — spreading capital across asset classes, geographies, and strategies so that no single event can permanently impair your financial future.
2. Short- and Long-Term Drawdowns
Drawdowns — periods where a portfolio declines meaningfully from its peak — come in two flavors. Short-term drawdowns are part of the normal rhythm of investing. Long-term drawdowns are more dangerous, especially for investors who are drawing on their portfolios for income.
One tool we use to address drawdown risk is trend-following hedge funds (also called managed futures). These strategies are designed to be uncorrelated to equities and can provide meaningful protection during extended market dislocations. During the 2022 inflation shock, for instance, when both stocks and bonds were down roughly 16–19%, the managed futures strategies we recommend gained over 50%.
3. Long Periods of Poor Returns
Some of the most damaging scenarios for investors are not dramatic crashes but slow, grinding decades of underperformance. Japan’s equity market is the classic example: it peaked in 1989 and did not recover that level for over 30 years. U.S. investors who were heavily concentrated in domestic equities in the early 2000s experienced a similar, if less extreme, “lost decade.”
Our approach to this risk involves two strategies. First, we seek sources of predictable, yield-oriented returns — NNN lease real estate, infrastructure, private credit, and stable yielding multi-family real estate — that generate income regardless of equity market direction. Second, we emphasize global diversification, ensuring client portfolios are not entirely dependent on U.S. equity leadership continuing indefinitely.
4. Benchmark Envy and Behavioral Risk
One of the most underappreciated risks in investing is behavioral. When clients measure their portfolios solely against the S&P 500 and fall short in a strong year, frustration can lead to performance chasing — abandoning a sound, diversified strategy in favor of whatever has recently outperformed. This rarely ends well.
We encourage clients to anchor expectations at the full balance sheet level over long timeframes — a 7–9% annualized return over 20+ years is a sound and achievable target for a well-constructed portfolio. It is also worth remembering: every additional 0.50% of expected return above that level requires meaningful additional risk. If that risk materializes, it shows up as volatility and drawdowns — not as guaranteed excess return.
5. The “Water Cooler” Effect: Peer Performance Comparisons
Social dynamics are a real force in investing. Hearing about a colleague’s spectacular returns in a concentrated technology bet or a speculative trade like Gold or Bitcoin can create pressure to deviate from your plan. This peer-driven performance chasing is a common sources of self-inflicted investment losses.
Our advice: work closely with your financial advisor to periodically review whether your portfolio is properly tuned for your goals — whether that means tilting toward stronger performance, reducing risk, or a combination of both. Your portfolio should reflect your plan, not your neighbor’s.
6. Regulatory and Policy Risk
Not all markets are created equal. Investments in lightly regulated structures — like real estate syndications, opaque private funds, or markets with limited legal recourse — carry risks that are easy to underestimate when returns look attractive.
Similarly, policy risk — changes in tax law, interest rate policy, or government regulation — can meaningfully affect investment outcomes over time.
Our approach is to stay with properly regulated, transparent markets and limit exposure to structures where regulatory oversight is thin.
For policy risk, the answer is thoughtful sizing — no single bet large enough to be catastrophic — and ongoing monitoring so we can act when circumstances change.
7. Liquidity Risk
Can you access your money when you need it? Illiquid investments — certain private funds, real estate partnerships, and alternative structures — often offer attractive returns precisely because they require you to lock up capital for years. This is fine if sized appropriately but can become a serious problem if life circumstances change and liquidity is suddenly needed.
We address this through careful position sizing and a preference for evergreen structures — investment vehicles with periodic liquidity windows — over fully locked-up funds. Illiquid investments should complement, not dominate, your portfolio.
8. Volatility — Understanding What It Really Means
Volatility is perhaps the most discussed risk — and often the most misunderstood. A few important distinctions:
- Upside volatility ≠ downside volatility. A portfolio that swings up 20% is very different from one that swings down 20%. Conflating the two leads to overly conservative positioning that sacrifices long-term growth.
- Private alternatives can obscure volatility. Private funds often report smoothed returns that do not mark-to-market in real time. This can make a portfolio appear less volatile than it truly is — a phenomenon worth understanding before drawing comfort from low reported volatility numbers.
- Volatility tolerance is personal and often unknown. Many investors overestimate their comfort with drawdowns until they experience one. We use risk assessment tools during onboarding and revisit them periodically to ensure the portfolio remains aligned with what clients can genuinely stomach.
9. Inflation Risk: The Silent Eroder
Inflation does not trigger panic the way a market crash does, but it is insidious: over time, the purchasing power of your wealth quietly diminishes. A portfolio that earns 5% nominally in a 4% inflation environment is delivering far less real wealth than it appears.
The antidote is ensuring your portfolio includes equities and inflation-sensitive real assets — real estate, infrastructure, and floating-rate credit instruments — that can grow in value alongside rising prices rather than being eroded by them.
10. Complexity vs. Simplicity
Finally, risk also lives in complexity itself. Some clients are well-suited for — and genuinely interested in — a sophisticated portfolio spanning multiple asset classes, alternative strategies, and tax optimization structures. Others prefer a simpler approach they can fully understand and stay committed to. Neither is wrong.
What matters is that the level of complexity in your portfolio matches your temperament. A sophisticated strategy you abandon in a moment of panic is worse than a simpler strategy you hold through a downturn.
Putting It All Together
Risk is not a single thing — it is a family of challenges, each requiring its own response. At Everest, we think about all of these dimensions when constructing and monitoring client portfolios. Our goal is not to eliminate risk, which is impossible, but to ensure that the risks you are taking are the ones you have consciously chosen, properly sized, and matched to your goals and timeline.
If any of these risks resonate with you, or if you would like to review how your current portfolio addresses them, we invite you to schedule a conversation with the Everest team. We are here to help.
If you’re interested in learning more, schedule an introductory, no-obligation meeting by contacting us at 408-502-6015 or emc@everestprivatewealth.com.
Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Everest Private Wealth Corp. is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Everest Private Wealth Corp. and its representatives are properly licensed or exempt from licensure.