This is a picture of a squirrel that I saw in Philly. I named him Snuggles. He was aggressive. I have no point.
…anyway. My video blog this morning addressed risk. Let’s continue that conversation I believe that the majority of poor investment decisions come from a misunderstanding of risk. Risk, is often confused with the more specific “market risk”. Although “market risk” is, itself, misunderstood, I believe that the other types of risk are what get people in to trouble.
Put on your finance hats, boys and girls. Because heeeeeeeere we go. Market risk is the chance that an investment will decline in value due to a general decline in the financial markets. This is the most misused type of risk. I believe that younger generations don’t properly assess the market risk in their portfolio. A long(er) investment time horizon can help balance out market risk, but, generally speaking, you shouldn’t risk your entire portfolio for absurd returns. Now, I can’t and I won’t give you specific investment advice in this forum, but risking a -40% downside to achieve a +40% upside is never prudent. Like I mentioned, a long term time horizon will help the returns level out, but usually people lose money and then bail (locking in their losses).
The worst thing that I generally see is when a person close to retirement discovers that they may come up short of their retirement goal. The person is then faced with a very tough decision. They can get more aggressive with their retirement investment, they can invest more money, they can delay their retirement date, or they can reduce their retirement lifestyle goal. People, when acting alone without good financial advice, usually choose to get more aggressive. They then have a great deal of market risk. They focus on the potential for a +30% gain, but they forget that a -30% loss will set their retirement back for years to come.
What are the other types of risk that people forget about? Liquidity risk, credit risk, interest rate risk, inflation risk, currency risk, opportunity risk, income risk, prepayment risk, unsystematic risk, call risk…do you get my point?
People mismanage their market risk, while all of these other risks systematically eat away at their portfolios. My advice is to take it easy when it comes to market risk. Your portfolio isn’t invincible, but there is good news. McRib is back! I can’t believe that the McRib use to be my favorite thing in the world back in 1990. Coronary risk.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.