Risk can be similar to Whack-A-Mole where something pops up unexpectedly. When advisors warn about risks, most assume we mean investors planning for retirement. For families with dependent children, the biggest risk is a wage earner dying prematurely. No one likes to think about dying, so people often pretend it won’t happen. I didn’t die when our children were young, but we had insufficient insurance. Don’t be like me. Even stay-at-home spouses need coverage, too.
Estate planning is another death-related risk people discount. If you are dead and have neglected a will, the courts could decide who looks after any minor children. No one dies without a will; they die intestate, which means the state furnishes one for you, but it could be different from your wishes.
The likelihood of losing money spooks many into safe investments. At the height of his popularity in the 1930s, no one in Hollywood got paid more than entertainer Will Rogers. I especially like his quote, “The return of your money is more important than the return on your money.” It’s a double-edged sword though. Focusing only on the return of your money ignores inflation. Three percent inflation sounds innocuous, but 3 percent inflation reduces buying power by 50 percent. It’s not hocus pocus but basic algebra.
The fear of losing money has encouraged the growth of investment products for sale to risk-averse investors. Equity-indexed annuities promise the ability to protect principal and lock in interest-earning while avoiding stock market fluctuations. Sounds great, but if you take too much money out before the “surrender period” ends, the guarantee goes away, and you pay a surrender charge. In almost every case a mix of index funds and CDs is a better option.
Individual stocks carry specific company risk, which explains why broad market indexes are a better option. Not long ago General Electric was considered a blue-chip stock suitable for widows and orphans. Dynamics changed, and the company’s once-hallowed dividend is now a mere penny. It may be tempting to own stock in your employer’s company, but if the company’s fortunes turn sour, you might face a double whammy of job and investment losses.
To compensate for today’s still low interest rate environment, investors feel compelled to chase higher yields for additional income. Higher yields come with greater risk. Facing inadequate retirement savings, others seek growth by increasing their stock allocation. Both strategies can be dangerous. Others even pursue financial nirvana in real estate that has liquidity risk in addition to principal risk.
The SEC championship game spurred today’s column. Get the picture, Georgia faked a punt on fourth and eleven late in the fourth quarter. Alabama stuffed the play and won the game. Despite his name, Georgia’s coach was not smart and doomed his team with foolish risk. Don’t be like him.
You can’t always get what you want but Buz Livingston, CFP can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.