Risky Business: How Understanding Risk Can Impact Your Financial Wellbeing

Following a broadly volatile year, are investors still on a train plummeting toward financial distress in 2023? According to one study, 67% of Americans are more concerned about paying bills right now than saving for retirement; 82% worry rising inflation will continue to have a negative impact on their purchasing power; and 77% of those surveyed think the market will continue to be very volatile in 2023.1 With uncertainty looming, can investors afford the potentially inevitable variation in their portfolios?

All investing includes risk. Understanding that risk – from both the mathematical and behavioral outlook – can help investors plan for their long-term financial goals.

The Financial Industry Regulatory Authority (FINRA) defines risk as the possibility that a negative financial outcome that matters to you may occur.2 Generally, people’s rationale with investing is that they expect to be rewarded for the risk they are taking.2 But what happens when risk goes unrewarded?

“There is no guarantee that higher risk leads to higher return,” said Dr. Terrance Odean while speaking at Matson Money’s Advanced Advisor Conference last month. Odean, a member of Matson Money’s Academic Advisory Board and Rudd Family Foundation Professor of Finance at Haas School of Business at the University of California, is a leader in the field of behavioral finance, boasting extensive research in the areas of investor behavior, investor biases and habits. His research reveals how behavior can destroy investor performance and the ability to create wealth. “Sometimes a risky investment is simply risky,” he said.

When creating a long-term investment strategy, understanding the dimensions of risk and return measurement, the significance of the Three-Factor Model, and the implications of diversification can be critical components for wealth creation. These factors lay the foundation for minimizing potential market highs and lows throughout an investor’s journey.

Measuring Risk

Risk can be measured by evaluating the potential volatility and standard deviation of an investment. Market volatility is the frequency and magnitude of price movements, both up and down.3 Volatility is measured by the standard deviation of price changes over a period of time.3 Standard deviation can create a framework for understanding the potential change in value as well as the odds of that change happening; According to Forbes, 68% of the time, values will be within one standard deviation of the average, 95% of the time they will be within two, and 99.7% of the time they’ll be within three.3 The larger the standard deviation, the more potentially volatile the investment.

The Three Factor Model

At Matson Money, our investing methodology, the Matson Method, incorporates using the Fama-French Three Factor Model for analyzing portfolio risk and return. In 1991, Eugene F. Fama and Kenneth French conducted an investigation into the sources of risk and return. Rooted in Efficient Market Hypothesis, their research showed how a portfolio’s exposure to three simple but diverse risk premium factors can determine a majority of investment results. The three factors are: the market factor, the size factor, and the value factor.  Their study concludes that the expected rate of return is equal to the risk-free rate plus the three factors.4

Matson Money utilizes the Three-Factor Model when engineering portfolios to determine the allocation between equities and fixed income, small and large equities, and value and growth equities in each of the Matson Money investment models.

Implication of Diversification

A third component to help offset risk is diversification. Diversification is a tool to reduce potential risk by investing across various financial instruments, industries, and other categories.5 “It’s very dangerous to be myopically focused on just a couple stocks,” says Mark Matson, Founder and CEO of Matson Money. Instead, investors should diversify globally. Matson Money’s portfolio consists of over 25,500 unique holdings in 21 asset categories across 78 countries; as of December 2022.

The Human Behavioral Element

Investing can be both mathematical and psychological. Something as simple as peer influence can encourage investors to make potentially risky decisions around their money. “Take Bitcoin for example,” said Odean. “Those who lost were mainly people who heard about all the money that was being made – or knew someone who was making money – or watched those Super Bowl ads. When someone says ‘it’s risky, but it has high expected returns,’ that is just not true.” Instead of being caught up in the allure of a potentially large payoff, investors should stop to consider the potential risks and rewards.

For more than 30 years, Matson Money’s message to investors has not wavered: invest for the long-term, own equities, diversify globally, and rebalance systematically. While all investments include risk, we are committed to empowering investors to be prudent and disciplined in their investing strategy.

“No one can tell you where the next 20% movement will be, up or down,” Matson said. “But we know throughout history the next 100% movement is always up.”

Attend the American Dream Experience, a free, two-day educational workshop on purpose and investing, to determine your risk preference and develop an investing strategy based on Nobel Prize-winning research and academic investing principles.

1. Majority of Americans are More Concerned About Paying Bills Right Now Than Financial Future. Business Wire. January 24, 2023. Retrieved 12 April 2023 from https://www.businesswire.com/news/home/20230124005429/en/Majority-of-Americans-are-More-Concerned-About-Paying-Bills-Right-Now-Than-Financial-Future.

2. Investing Basics: Risk. FINRA. Retrieved 12 April 2023 from https://www.finra.org/investors/investing/investing-basics/risk#:~:text=What%20Is%20Risk%3F,market%20conditions%20(market%20risk)..

3. Ashford, Kate & Benjamin Curry. What Is Market Volatility – And How Should You Manage It? Forbes. February 13, 2023. Retrieved 12 April 2023 from https://www.forbes.com/advisor/investing/what-is-volatility/.

4. Fama-French Three-Factor Model. Corporate Finance Institute. December 4, 2022. Retrieved 12 April 2023 from https://corporatefinanceinstitute.com/resources/valuation/fama-french-three-factor-model/

Eugene F. Fama, Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, No. 2, (June 1992); Eugene F. Fama, Kenneth R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, No. 1, (February 1993); Eugene F. Fama, Kenneth R. French, “Profitability, Investment and Average Returns,” Journal of Financial Economics 82, No. 3 (December 2006); Eugene F. Fama, Kenneth R. French, “A Five-Factor Asset Pricing Model,” Journal of Financial Economics 116, No. 1 (April 2015); 

.5. Lioudis, Nick. The Importance of Diversification. Investopedia. June 15, 2022. Retrieved 12 April 2022 from https://www.investopedia.com/investing/importance-diversification/.


This content is based on the views of Matson Money, Inc.  This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.  

This content includes the opinions, beliefs, or viewpoints of Matson Money.  All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors.  Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.  

Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.    


Matson Money Investment Philosophy 

Matson Money believes that the stock market is efficient and that free markets work.  Based on this belief, Matson focuses on attempting to capture market returns utilizing asset class or structured funds, seeks to utilize broad diversification, and attempts to eliminate stock picking, track record investing, and market timing from the investment process.  

Matson Money manages client investments utilizing a fund-of-funds strategy.  Client accounts are invested in a mix of a proprietary series of mutual funds advised by Matson, which allocate investments across three broad asset classes:  domestic equity, international equity, and fixed income.  Matson-advised funds seek to allocate across these broad asset classes by investing in various mutual funds or ETFs. The specific target allocation of each client’s Matson-advised strategy depends on the individual investor’s risk tolerance and investment horizon, and is selected by the client at account opening.  More information on mutual funds, ETFs, and associated fees, is available in fund prospectus documents, available online at: http://funddocs.filepoint.com/matsonmoney/ 

Fund of Funds Risk:  The investment performance of client portfolios is affected by the investment performance of the underlying funds in which the portfolio is invested. The ability of the total client portfolio to achieve its investment objective depends on the ability of the underlying Matson-advised mutual funds to meet their investment objectives, on Matson’s decisions regarding the allocation of the portfolio’s assets among the underlying Matson-advised mutual funds, and on Matson’s decisions regarding investments made by the underlying Matson-advised mutual funds. The portfolio may allocate assets to an underlying fund or asset class that underperforms other funds or asset classes. There is no assurance that the investment objective of the portfolio or any underlying fund will be achieved. When the portfolio invests in underlying funds, investors are exposed to a proportionate share of the expenses of those underlying funds in addition to the expenses of the portfolio. Matson may receive fees both directly on your account as well as on the money your account invests in the underlying funds, and the underlying funds themselves may bear expenses of the mutual funds or ETFs in which they invest. Through its investments in the underlying funds, the portfolio is subject to the risks of the underlying funds’ investments, with certain underlying fund risks described later in this content. More information on mutual funds, ETFs, and associated fees, is available in fund prospectus documents, available online at: http://funddocs.filepoint.com/matsonmoney/. 

References to Holdings  

Due to Matson’s investment philosophy and methodology, any references by Matson or by unaffiliated third parties to specific holdings, number of holdings, or specific countries or asset classes are references to the underlying funds in which the Matson-advised mutual funds invest.  Mutual funds currently use SEC Forms N-PORT and N-CSR to disclose their quarterly holdings at the end of each fiscal quarter (Form N-PORT replaced Form N-Q),therefore any specific holdings cited are accurate as of that date or is data provided directly by the underlying fund company itself, and do not in any way represent portfolio management research or trading decisions made by Matson Money, other than to the extent Matson Money has allocated Matson-advised mutual fund investments to such underlying funds. Form N-PORT can be found online at https://www.sec.gov/Archives/edgar/ 


Dr. Terrance Odean is a member of Matson Money’s Academic Advisory Board

Academic Advisory Board members receive compensation from Matson Money for their services which include, but are not limited to, independent leadership consulting; co-authoring white papers; and speaking at Matson Money conferences. Advisory Board members may also provide insight to Matson Money on portfolio construction, asset allocation, quantitative analysis, investor behavior and other areas of expertise, as needed. 

Eugene F. Fama, Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, No. 2, (June 1992); Eugene F. Fama, Kenneth R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, No. 1, (February 1993); Eugene F. Fama, Kenneth R. French, “Profitability, Investment and Average Returns,” Journal of Financial Economics 82, No. 3 (December 2006); Eugene F. Fama, Kenneth R. French, “A Five-Factor Asset Pricing Model,” Journal of Financial Economics 116, No. 1 (April 2015); 

Three Factor Model 

Fama, Eugene F. and Kenneth R. French. “The Cross-Section of Expected Stock Returns,” Journal of Finance, 47, June 1992.  

Efficient Market Hypothesis 

Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965. 

Modern Portfolio Theory 

Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. New York. Wiley. 1959. Print.