Investment Risk –What Matters What Doesn’t

 We live in interesting times. John F. Kennedy said and the origins are believed to be a Scottish curse. (Some say it’s  Chinese but I prefer Scottish). But, it’s true, these are interesting times. If we could only kick back, slip on the headphones and chill while all the weird stuff happens around and about us without really having it impacting our lives most of us would be happy and slightly entertained. The problem is that we’re all in this whether we like it or not. 

Today it’s all about uncertainty. It probably always was only we didn’t think too much about it.

When most of us started investing we didn’t expect that we’d be responsible for our own future. We thought we’d be supported by the company store like our parents and grandparents before us. We also figured the few bucks we salted away would be enough to put the cherry on the retirement sundae and let us take a cruise, a few extra trips to Vegas or summers at a cottage by a lake. No one explained that this was going to be life and death, eat or starve. Interesting times.

For better or worse we’re here and need to understand stuff. Let’s make one thing clear, no matter where you put your money it all has risk. Bury it in the backyard or at the neighborhood bank and you have inflation risk and loss of future purchasing power risk.

If you take a step up and buy a certificate of deposit or fixed annuity you have interest rate risk. The possibility of interest rates increasing while you’re locked into a lower rate.

You have company stock risk; owning too much of one company. There is equity risk, dividend risk (the loss or decrease, hello, BP?, Ford Motor?), allocation risk, portfolio risk, inflation risk, political risk, tax risk, currency risk, foreign risk and the grand daddy of them all- domestic economic risk.

In the old days investors only had a few risks they had to be concerned about but things have changed. Today an investor cannot buy a stock, fund, bond or exchange traded fund without knowing or unknowingly accepting a bushel basket of risk. It’s like ordering a steak, and you want the steak, but it comes on the plate with all the trimmings. You didn’t order the mushroom cap, the frizzy fried onion ring and that leaf of parsley that you don’t care to imagine where it’s been. You wanted steak but you got it all.

Today, as an investor,we have Greece risk, or the worries about countries we do little or no business with defaulting on their debt and that would impact countries we do do business with that would crush our global economy stocks. There is currency risk. Yesterday, unless you were traveling to Canada or Mexico for dinner, few of us worried about currency risk. Now we’re all talking the talk about the euro versus the yen and should we short one or go long the other and most of us don’t know what the hell we’re talking about even if someone explained it to us using a laser pointer and overheads.

We have BP risk and the possibility of a completely changing landscape and lifestyle for generations down south. No one knows what the oil spill will do and it’s a real concern and new risk that will impact investments that hold oil and oil service company stocks.  And, let’s not forget real estate, tourism, agriculture. Then you have possible defaults on city and state bonds along with highway, hospitals and schools. The list goes on.

Loads of investors are still sitting on the sidelines and licking their wounds and refusing to come back to the market until the canary doesn’t keel over. Of course by that time the markets will be where they were before the crash and all those folks will still be underwater and wondering what to do to catch up.

The investors who stuck it out and are 30% below their portfolio high are frustrated that they don’t have as much as they did 2 years ago and want it back as soon as possible. The markets are toying with them, going up one day and two steps back the next. It’s ugly, frustrating and a learning lesson.  There is something called the VIX along with consumer sentiment risk.

There is also frustration risk that creates desperate investors. The thinking is that there is someone somewhere making money and they, as investors,  should be there and not here.

The bottom line is that investing is fraught with risk. No matter where you save your money you will have short term volatility and risk. It always was and will always be.

In order to get through this without finding  yourself fitted for a canvas coat with long sleeves that wrap around and tie in the back start thinking the way professional investors think –unemotionally. One idea is to buy quality bonds with short maturities or put more money into dividend paying stocks simply to park money and get paid to wait this mess out. You can always go to cash but the problem is, as many have found, when to come back to the market and where. Plus, having money in cash earns you nothing. Most people with large cash holdings are no happier then those folks with stocks, bonds or mutual funds. In many cases less so.

If risk, of any kind is unappealing, I have no idea what you can do with your money except spend it all. In this very imperfect world there is no perfect answer.

If you have questions call Paul at 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.