Risk by David Maxwell
When I went to work for a large insurance company in Hartford, Connecticut on October 14, 1971, I was introduced to the concept of risk, be it life, property or monetary. The mission of the industry was, and still is, to provide a certain level of protection designed that seeks to mitigate these risks.
As investment professional we are trained to manage specific investment risks such as inflationary risks, risk of losing all one’s money also known as capital risk, timing risk, interest rate risk, market risk, credit risk also known as default risk, liquidity risk, call risk of a bond and legislative risk. There is an old saying that your money is never at greater risk than when congress is in session.
Risk to the typical investor centers more on what risk actually means to them and their money.
Will I lose all my money? Perhaps the greatest risk of all deals with retirees and what is known as retirement plan risk. That is the risk of investing too conservatively so as not to keep pace with inflation. Everything you spend is subject to inflation, medical, food, gas, taxes just to name a few.
Unfortunately, many investors confuse risk with volatility. Volatility is a normal characteristic of the market, which leads to emotion and that emotion leads to fear. Fear is not an investment strategy.
The best way to mitigate your emotions is ask yourself how much volatility can I endure and match that tolerance with quality companies that have earnings and pay dividends along with stable management and a sustainable product or service. Bonds are also useful in providing smoother performance, although rising interest rates can hurt that objective too. Bond values will decline as interest rates rise and bonds are subject to availability and changes in price. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
One option are mutual funds because of the diversification that is inherent in their portfolios. Investing in mutual funds involves risk, including possible loss of principal. Fund values will fluctuate with market conditions and it may not achieve its investment objective. But no matter what you decide, invest don’t bet!
Our job as financial advisors is to make sure you never run out of money, and hope you can feel confident knowing that you have invested in such a way that your financial goals and objectives are being pursued.
David Maxwell, AAMS, CEBS
LPL Financial Advisor
Maxwell Forsman Investment Services Inc.
*There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.