Measuring Risk

Risk comes in many forms. The numerous types of insurance available help us mitigate some risk. Often folks take elaborate measures to avoid any kind of risk. But risk abounds. Life is a risk.

To avoid risk it may make sense to keep your money in cash, money markets, CD's or stable value funds. You watch as the stock market completes daily gyrations. After a huge downturn you express relief that your pile of cash is safe. But then you groan during an upturn, lamenting all the profits "you could have made"!

Running water, over time, wears away stone or carves a riverbed.

So too does inflation and taxes which wear away at your purchasing power when you keep your money "too safe". Little by little, year by year your pile of cash shows the same amount, or maybe a tiny gain. But below the surface, inflation has dramatically reduced the goods and services you are able to buy.

Over time, your cash will suffer the same fate as the stone - it will be worn away.

Bite the bullet. Put your money to work for you.
Yes, keep your emergency fund in cash or money markets.
Yes, keep the money you'll need for purchases in the near future (12-18 months) safe. Invest the rest. The stock market goes up and down. If you draw a trend line on a stock market chart you will see that the trend, over time, has been up.

Be $ Smart - Work hard. Save. Make your money work hard too.

Creating an Investment Strategy - Part 1

When I wrote about market volatility last week, I mentioned "sticking with your investment strategy". Most folks never heard of an investment strategy and many financial advisers have neglected to develop one with their clients.

Let's review what is involved in building that strategy.

An Investment Strategy is your written statement that lists measurable goals and hopefully, shows repeatable results:

1. You must be able to assess and state your tolerance for risk (how much money you are willing to lose for potential gain?).

2. Determine your rules for buying and selling (both stocks and bonds).
Will it be decided by a certain percentage up or down? Will it be a target price? Having a rule removes emotion and allows you to act decisively.

3. Make provision for transaction costs( both commissions and fees).
Will you pay a fee for AUM (assets under management - anywhere from 1% to 2.75%) or will you pay straight commission for each buy/sell transaction? Or will you use a wrap fee that includes all?

4. Decide your preference for passive index funds (which may minimize taxes) or actively managed funds.
Passive funds pick a benchmark and rarely change the holdings whereas an actively managed fund has a manager or team who buys and sells at their discretion towards a stated objective.

5. Choose a Benchmark for comparison and measurement.
In order to measure the performance of your portfolio you must have something to measure it against. You may choose the S&P 500, the top 500 U.S. companies, the Dow Jones Industrial Average, the top 30 domestic companies or some other way to compare and measure how well or poorly your portfolio is performing.

Be $ Smart - with a written Investment Strategy you create the playbook to manage volatile markets.

Let me know if you need help writing your Investment Strategy. I'd be happy to offer guidance. Part 2 next week.

Another Risk to Consider - Longevity

Earlier in the year we reviewed the various types of risk you might encounter when investing - inflation, market, credit, currency exchange, default, etc.; we won't review them at this point.

There is one risk that has become more important for up and coming generations than those in the past - the risk of longevity. Living too long - lasting longer than your money - has prompted many financial planners to project to 100+ when determining "if you have enough to retire".

85 is now considered old, not 60 or 70. With exercise, decent diet and medical advances we all can anticipate a long life. The question arises: can we afford to live a LONG life?

Four tips to finance your antiquity:

- Start early - savings compound over time giving you a jump start. This is probably the most important move to make.

- Save more - saving 10% - 15% of your income would cover your retirement provides a good beginning. If you can, increase that number.

- Be more aggressive in your investing - a combination of stocks and bonds will appreciate over time. Increase the stock portion. If you are very nervous and insist on conservative investments, you must save even more!

- Work longer - plan on retiring at 68, 70, 75. Today's seniors are healthy, vibrant and mobile continuing to earn income well into their future. Do you see yourself among them?

Be $ Smart - start NOW to make sure your money lasts as long as you do. Call me for additional ways to save.

U.S. Treasuries

Among the safest investments are U.S. Treasuries. They are backed by the full faith and credit of the U.S government. (Backed by you and me and the taxes we pay.) When you start at the bottom of the investment pyramid, Treasuries are part of your investment foundation along with savings accounts, CD's and money markets.

Essentially, when you buy a Treasury you are lending money to the government.
Because U.S Treasuries are so safe, they earn very little interest as they carry minimal risk.

U.S. Treasuries come in several durations:
A Treasury Bill, or TBill, will mature in under a year,
Treasury Notes will mature in 1, 3, 5, 7 or 10 years and
Treasury Bonds, long bonds, mature in 20 and 30 years.

The most known Treasury is the 10 year which is used as a benchmark (measuring/comparison tool) for the Treasury market and for mortgage rates.

Treasuries may be bought through a brokerage account, at a federal bank and online at www.TreasuryDirect.gov.

Be $ Smart - build your investment portfolio foundation with some U.S. Treasury bills, notes or bonds for safety and predictability.

Risk Tolerance

Risk - the permanent loss of capital (money).

Over the past few weeks we have experienced much volatility in U.S. stock markets.
Volatility is the gyrations of stock prices in reaction to social and economic conditions. With the market moving up and down - making money and losing money - how do you protect your money and your future?

How much money can you bear to lose? NONE - most would say.
If we ask the question slightly differently - how much money must you keep absolutely safe to allow you to sleep at night? Your answer may show how much risk you are willing to take. Some may say 100% - then you would be considered risk adverse.

Others may say 20%; they would be considered to have a low risk tolerance.
But none of us likes to lose money. So how do I know where to put my money?

Money needed soon (1-2 yrs.) for a definite goal - a house down payment, a new car, an upcoming vacation - all must remain safe with little or no risk. The safe places to keep this money are:
savings accounts,
CD's (certificates of deposit at a bank)
most money markets.
You have NO risk tolerance for this money.

Money slated for mid-term goals (3-8 yrs.) - an Alaskan cruise in 5 years, college tuition for your ten-year old, a vacation house in 4 years - may earn slightly more interest if invested in short-term bond funds or certain high quality (blue chip) stocks.
You have small risk tolerance for these goals.

Money designated for retirement - 15, 20, 30 years away need greater exposure to risk to provide the growth necessary to build a sufficient nest egg. Here is where investing in stocks and bonds gives you growth opportunity but also increases loss possibility.
You have moderate risk tolerance for long term goals.

Extra money, over and above all your savings, may be allocated to higher risk.
This is not the rent or mortgage money. This is money you can afford to lose.
Real estate, commodities (e.g.metals, oil, coffee, grains) fluctuate wildly(high volatility)
You have high risk for these investments.

Be $ Smart - know your risk tolerance. Invest wisely so you may sleep well.