I hear it all the time: investing is risky and it is not a sure thing. I just read a good article by The Motley Fool that discusses how investment volatility is almost always associated with risk. Beta, as one measure of risk. measures how much more a particular investment (namely a stock) deviates from the actual returns or movement of the overall market. While I do not agree with the articles slight suggestion that we throw Beta and other volatility measurements out the window, I would agree that investment volatility and downside risk is NOT the biggest risk we face. The article does a good job of addressing the fact that the biggest risk we face in achieving any financial goal and more specifically or retirement goals is the risk of outliving our assets or drastically undermining our lifestyles due to a loss in purchasing power. As you know the costs of goods and services go up over time - around 4.1% on average per year to be exact. What does that meant to you? Your money must be growing to outpace that average or your purchasing power is losing value. They warn that many people avoid the investment risk associated with volatility and they make the grave mistake of socking away money in investments that are way too conservative like money markets, CDs, and short-term bonds. Don't be fooled and buy into the fear that investment risk is to be avoided at all costs - it is really the risk that you will lose your purchasing power or, worse, outlive your assets, that is the biggest risk of all. Stocks continue to be the best hedge we have against inflation. Almost everyone should have some portion of their assets in stocks to help mitigate inflationary erosion.
May 11, 2007
What is the real risk?
I hear it all the time: investing is risky and it is not a sure thing. I just read a good article by The Motley Fool that discusses how investment volatility is almost always associated with risk. Beta, as one measure of risk. measures how much more a particular investment (namely a stock) deviates from the actual returns or movement of the overall market. While I do not agree with the articles slight suggestion that we throw Beta and other volatility measurements out the window, I would agree that investment volatility and downside risk is NOT the biggest risk we face. The article does a good job of addressing the fact that the biggest risk we face in achieving any financial goal and more specifically or retirement goals is the risk of outliving our assets or drastically undermining our lifestyles due to a loss in purchasing power. As you know the costs of goods and services go up over time - around 4.1% on average per year to be exact. What does that meant to you? Your money must be growing to outpace that average or your purchasing power is losing value. They warn that many people avoid the investment risk associated with volatility and they make the grave mistake of socking away money in investments that are way too conservative like money markets, CDs, and short-term bonds. Don't be fooled and buy into the fear that investment risk is to be avoided at all costs - it is really the risk that you will lose your purchasing power or, worse, outlive your assets, that is the biggest risk of all. Stocks continue to be the best hedge we have against inflation. Almost everyone should have some portion of their assets in stocks to help mitigate inflationary erosion.
April 16, 2007
Love her or hate her
Despite how you personally feel about Suze Orman she probably does more good than harm. As a financial professional, I will begrudgingly admit that I have, on occasion, enjoyed listening to her and have even caught a glimpse of her on TV. Shhh - don't tell anyone. You simply cannot deny that she has a tremendous reach and I suspect her impact on improving overall financial literacy ranks her in the top five. However, I have heard that she told her listening audience that the stock market was too risky and she did not trust it for her long-term money. Whoa - hold on a second!
I think we need to clarify this a bit. Yes, the stock market is risky and, yes, it is not for everyone, however, the investment risks associated with the stock market are less so than the risk of significantly reducing the purchasing power of your savings and outliving your assets! Let me give you a very simply example. If you wanted a nearly risk-free investment you can expect to earn about 4% a year on average (higher or lower depending on current market conditions). If the average annual inflation rate (increased costs of goods and services) is approximately 4% how much are you really making? I am no mathematician, but that would be approximately ZERO! What about bonds, you ask? Well, since you are assuming a bit more risk than money markets, CDs, and other cash equivalents Bonds tend to fair better over time. On average the bond market has returned about 6% on average per year which helps out pace the ugly head of inflation by some (see Templeton Financial Services Blog). Investing in the stock market does not come with risks, however, it still remains on of the best inflationary hedge there is. Even those nearing or in retirement should have a decent portion of their portfolio in stocks/equities. Many people are living 20-30 years in retirement and inflation plays a big part. The key is to manage risk and find ways to obtain most if not all of the potential return/rewards of the stock market with the least amount of risk. Certainly one way is to lime exposure to you the market by having a mix of stocks, bonds, and cash appropriate to your situation. In addition, diversify your assets to include large cap, mid and small cap, and international as a way to mitigate risk. Overall, however, I think Ms. Orman misses the mark when suggesting people avoid the stock market all together. To achieve the necessary growth and to out pace inflation, stocks are necessary in everyone's, young and old, portfolio. Smart strategies and risk management, however, remain paramount.
I think we need to clarify this a bit. Yes, the stock market is risky and, yes, it is not for everyone, however, the investment risks associated with the stock market are less so than the risk of significantly reducing the purchasing power of your savings and outliving your assets! Let me give you a very simply example. If you wanted a nearly risk-free investment you can expect to earn about 4% a year on average (higher or lower depending on current market conditions). If the average annual inflation rate (increased costs of goods and services) is approximately 4% how much are you really making? I am no mathematician, but that would be approximately ZERO! What about bonds, you ask? Well, since you are assuming a bit more risk than money markets, CDs, and other cash equivalents Bonds tend to fair better over time. On average the bond market has returned about 6% on average per year which helps out pace the ugly head of inflation by some (see Templeton Financial Services Blog). Investing in the stock market does not come with risks, however, it still remains on of the best inflationary hedge there is. Even those nearing or in retirement should have a decent portion of their portfolio in stocks/equities. Many people are living 20-30 years in retirement and inflation plays a big part. The key is to manage risk and find ways to obtain most if not all of the potential return/rewards of the stock market with the least amount of risk. Certainly one way is to lime exposure to you the market by having a mix of stocks, bonds, and cash appropriate to your situation. In addition, diversify your assets to include large cap, mid and small cap, and international as a way to mitigate risk. Overall, however, I think Ms. Orman misses the mark when suggesting people avoid the stock market all together. To achieve the necessary growth and to out pace inflation, stocks are necessary in everyone's, young and old, portfolio. Smart strategies and risk management, however, remain paramount.
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