Risk is not volatility. Risk is the probability of not achieving your goal. And most investors take the most risk at precisely the moment they no longer need to.
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One of the most common things people talk about when they think of risk is the risk of loss. If I buy an individual stock and it falls fifty percent, most people call that investment risk.
Until recently that was a hypothetical. It is not anymore.
A recent Initial Public Offering on the Nasdaq exchange was priced at $135, opened at $150, and ran past $225 in the weeks that followed. In less than two months, it fell to about $107, roughly half its peak.
My point is not about the business, but about the buyer. The same purchase, of the same security, on the same day, was perceived as an investment for some people and pure speculation, a gamble, for others. The difference had nothing to do with the company itself. It had to do with whether the buyer had a defined goal, whether the position was sized against it, and whether anything they cared about achieving depended on it performing accordingly.
That matters more than usual here, because this offering sent an unusually large share to retail investors through the platforms most individuals use. Some sized it as a small, deliberate position they could afford to lose entirely, and made a defensible decision that hedged against whatever happens next. Others bought as much as they could afford, or more, because they did not want to miss the next big tech run. Those people were speculating, and the drawdown was likely a painful reminder of the risks of speculating.
There is nothing wrong with speculating, provided you know that is what you are doing, you have sized it accordingly, and no goal you care about depends on it. The problem is never speculation. It is speculation mislabeled as investing and asked to carry weight it was never built to carry. Which brings me to how I define risk, and it is not volatility and not loss.
Risk is the probability of not achieving your goal.
This sentence is the foundation for everything that follows.
A Question I Have Asked Thousands of Times
I have stood in front of thousands of advisors and investors over 37 years in this business, and I like to ask a simple question: If you could achieve your financial goals with certainty, should you take risk?
The answer is always the same, nearly unanimous: No.
And yet we all do. The same people who answered no with total conviction are often holding portfolios carrying far more risk than their goals require. They are not confused about the principle. They have simply never had a framework that told them when enough was enough. That gap between what people know and what they do is where most of the real damage in this business happens. It is not caused by bad markets or bad products. It is caused by the absence of a defined finish line. As a friend used to say to me, “I don’t have clients with investment problems, I have investments with people problems.”
Serving for the Match
I played competitive tennis growing up and in college, and I still compete occasionally, not only to test my progress, but to also feel that anxiety of trying hard to win and overcoming the stress that often leads to losing. Tennis is a humbling, mentally taxing sport. It is also where I learned the lesson that took me another twenty years to apply to my own portfolio.
Ask experienced players to name the hardest game in a match, and almost none will say the first one. They will tell you it is the game where you serve for the match. For the majority of players, it’s the game that carries the most emotional volatility. It is common to look at the finish line, forget the work still ahead, and begin celebrating the win in your head too early.
The reason has nothing to do with the opponent. Up five games to three, serving, one hold from winning, you have already done the difficult work. The correct strategy is boring and obvious: high first-serve percentage, give yourself plenty of room for error, make your opponent generate the winner, take no unnecessary risk. Nothing about the situation calls for brilliance. Don’t play not to lose, but don’t go for broke either.
But something happens when the finish line becomes visible. Some players tighten up and push the ball. Others go for the spectacular win, because they can suddenly picture the match ending with a highlight-reel. Both are the same error wearing different clothes. Both abandon the strategy that produced the lead at the moment it mattered most.
I have lost matches this way. More than I care to count.
The most dangerous moment in a tennis match is the moment you can win it. The most dangerous moment in a portfolio is the moment it can fund the goal.
This is the observation I would most like readers to take away, because it is both the least understood and the most expensive. Investors do not take their greatest risk when they are behind. They take it when they are ahead, when the goal has moved from aspiration to arithmetic, and the only remaining job is to finish.
You Cannot Measure Risk Without a Goal
Institutional investors solved this problem decades ago, and they solved it because they had no choice.
A pension plan cannot define risk as volatility, because it has a liability. It knows what it owes, roughly when, and for how long. That forces a different question: not how much did the portfolio move, but what is the probability these assets fail to meet these obligations. Institutions track funded status and measure surplus risk, and when a plan becomes fully funded, the sophisticated response is to reduce risk deliberately, because the only thing left to do is give the win back.
Individual investors have liabilities too. Tuition in six years. A house in three. Thirty years of retirement income with an uncertain endpoint. These are every bit as real as a pension obligation. We simply do not call them liabilities, so we rarely manage against them with the same discipline.
That is why the framework I use is borrowed from the institutional world, and it starts nowhere near the portfolio.
Begin by defining the goal itself. Not a return target, not a benchmark, but the actual objective in plain terms. A home. An education. A retirement. Then define the financial need that funds it, in dollars rather than in feeling.
Next, establish the term. How far are you from the goal, both in years and in the amount you have already accumulated toward it. Distance and progress are different variables and both matter.
Then establish the duration. This gets skipped almost universally, and it changes everything. Do you need a lump sum on a specific date? Four years of tuition? Or an uncertain stream lasting an unknown number of years, which is what retirement actually is? A goal requiring one payment in 2032 and a goal requiring payments from 2032 onward are not the same problem and cannot be funded the same way.
Only then can you have an intelligent conversation about how much risk is required. Note the word. Required. Not tolerated, not desired, not appropriate for your risk profile. Required to fund the objective.
That is what makes the exercise institutional rather than emotional. Risk stops being a preference and becomes an input, derived from the goal rather than from a questionnaire about how you feel when markets fall.
The Most Overlooked Question in Investing
Once the goal is defined, once you know your term and your duration, you can finally ask the question almost nobody asks.
When I can achieve this goal, whether that is today or ten years from now, how do I de-risk so that I never fall short of it once it has become achievable?
Sit with that, because it inverts how most portfolios are managed. The standard approach asks how much return we need and how much volatility we can stand. This asks something better: at what point have we won, and what is the plan for the moment we get there? The biggest problem facing most investors is “they go for more.” Just like taking the wild swing to conclude a match. The desire for more, the highlight, the little bit extra, also increases the chance of loss when you have already won.
The failure I see most often is not the investor who took too much risk early. Early risk, properly sized against a long horizon, is usually correct and often insufficient. The failure is the investor who was fully funded at 62 and stayed positioned as though they were 42, because the portfolio had been working and nothing about a portfolio that is working feels like a problem.
Then the sequence turns in the first three years of withdrawals, and a goal that was mathematically secure no longer is. The market did nothing unusual. The plan simply never included an instruction for what to do at the point you are about to win.
Some Goals Can Be De-Risked. Some Cannot.
I want to be honest about the limits, because this is where a lot of financial writing becomes dishonest by omission.
Some goals can be de-risked almost completely. A known amount on a known date is close to a solved problem. Match the asset to the liability, accept a modest return, remove the uncertainty. If the money is there, the sophisticated move is to stop playing for it.
Other goals cannot be, and retirement is the clearest example. The duration is genuinely unknown. You are funding a liability whose endpoint nobody can specify, against an inflation rate nobody can predict, which means eliminating market risk simply exchanges it for longevity and purchasing power risk. Those are not smaller risks. They are quieter ones.
This is why I resist the phrase used constantly in our industry, that we help clients eliminate risk. We do not. Nobody does. What we do is help clients choose which risks to hold, sized against a defined objective, and stop holding the ones that no longer serve a purpose.
A portfolio carrying more risk than its goal requires is not aggressive. It is undisciplined, and that is remarkably hard to see until hindsight makes it obvious.
Closing Out
The process begins with the goal and ends with an understanding of how much risk you need to take, or in many cases how much you do not need to take, to satisfy it. Everything in between is implementation.
I would ask any investor reading this to answer three questions honestly. What is the goal, stated in dollars and dates rather than adjectives. Am I on track to fund it? And if the answer is yes, what exactly am I still playing for?
That last question is the one I have watched people avoid for 37 years. It is uncomfortable, because it asks you to stop pursuing more at the precise moment pursuing more feels easiest and most justified. Everything is working. The portfolio is up. Why change anything now?
Because you are serving for the match. And the only way to lose from here is to forget that you are ahead.
The objective was never to win the most points. The objective was to win the match.
Define the goal. Fund the goal. Then have the discipline to stop taking risk you no longer need. That is the whole of it, and I have yet to find a market in which it stopped being true.
Michael Lane is Executive Vice President and Head of Asset Management at SEI. He began in financial services in 1989 and previously served as Chair of U.S. Wealth at BlackRock and in senior roles at Dimensional Fund Advisors. He is the author of three books, and still competes in open tennis events.