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Why most “experts” won’t tell you the truth about risk? January 30, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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Most people are afraid of financial risk; even the word risk scares the majority.  Look at the commercials for investment firms and financial planners; they don’t even mention the word, just tell you how strong they are (we know that is a lie), or how they are there to protect your assets (another lie).  If these folks were being truthful, they would tell you the following:

There is no such thing as a risk-free investment.  Your rate of return will depend upon your willingness to accept risk.  The real issue is not whether you want to take risks,  but which risks you want to take.

If there is one financial truth you learn from my blog, please learn the above statement. 

In my opinion the greatest risk taken is by people who arrange their lives around avoiding risk.  These people are fooling themselves into thinking they can avoid the risk of life. 

Once you accept the fact of risk as unavoidable you can then plan and manage risk.  Honesty with yourself is the starting place.  Look at your savings, your retirement accounts, your assets.  If you really take a look can you honestly say they are enough to take care of you during your 20 years in retirement?  Or, are you thinking, as soon as the kids are grown up or when we get this house paid for or there isn’t enough money to pay my bills now how am I going to save or any other excuse?  Because there is always something even after you get through all those events.  I had some clients, nice people, who have $125K in their 401K.  Used to be around $200K.  They are in their late 40s.  A couple of kids.  They have 90K in income.  I asked them, how much they need to retire on?  No idea.  So I ask them if they think their plan will get them there?  No answer.  So, I suggest building a plan starting with their current reality.  They would think about it!  Think about it??????  What is there to think about?  I here from someone else they put their 401K from a stock to bond mutual fund.  Ouch, with interest rates so low as soon as interest rates rise their bond fund will drop.  They don’t know this. They don’t understand risk.

Now here is another one of those truths about money.  You can manage risk without severely curtailing your return.

The common advice about risk is as follows:

Keep your money in a bank because it is protected from loss by the FDIC; or

Diversify your stocks [usually by owning mutual funds]; or

Pay off all your debt including your mortgage; or

Perform asset allocation [usually on your mutual funds]; or

Buy insurance products because of the guarantee against loss; or

Investing in [stocks, real estate, options, commodities] is too risky; or

Get a good career and you will never have to worry about money.

All of these statements do one thing.  Allow you to pretend that risk isn’t there.

It is.  Accept the fact of risk and learn to manage it in ways that doesn’t drive your rate of return down to a point of having no chance of reaching your financial goals.

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1. More on Risk! « Uncommon Financial Wisdom - February 9, 2009

[…] managing risk versus avoiding risk trackback I have been posting much on risk of late and why investment risk is rarely spoken about honestly.  The reason is that recent history has allowed human emotions/psychological […]


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