Safe? Risk? These two words can in some ways seem counterintuitive to their dictionary definitions when we look at them being used on Wall Street. Safe is defined as, “protected from or not exposed to danger or risk.” While risk is defined as, “a situation involving exposure to danger.” Based on those definitions you would expect to want to pursue safe investments and leaving those risky ones alone. However, when it comes to investing these definitions become a lot more complicated.
In the financial world “safe” and “risk” reference the potential for you to lose your initial investment. In a safe investment you can expect the possibility of losing what you invested to be low. While you won’t likely lose your money in this investment the return on the money you invest will also be low. (Think bonds, money market funds, bank notes, etc.) In a risky investment the potential for you to lose what you invested is higher, but to entice you to take the chance you will also earn a much higher return on your money (Think stocks, options, hedge funds, etc.).
Sounds simple right? If you are a risk taker and want a higher return, simply put your money in more risky investments. If you want to play it safe and can’t afford to lose your investment simply put all your money in safe investments.
However, if you employed either of these strategies today you could set yourself up for tremendous financial pain.
If you use a “safe” strategy and put all your money in bonds and money markets today your return on much of that money may be less than the rate of inflation. This means that while you are not likely to lose your initial investment the purchasing power of that money may decrease over time due to inflation. Therefore, your safe investment may simply be a safe way to lose money.
If you use a “risky” strategy and put much of your money in stocks, a recession or a depression could create a significant decline in your investment making you unable to retire how you want to or when you want to. You may have to wait years for the market to return to its previous highs so that you can safely retire. This is why we focus on using a balanced approach.
In your younger years you can afford to take more risks because the time available until you retire is much greater. Those with greater than 15 years to retirement may have a risk tolerance allowing them to put more of their portfolio in equities or other assets that carry higher risk/return and lower amounts in bonds or money markets that have lower risk/return. That way they give their money great opportunity for growth, but if the market dips and they need money for a house down payment or a car, they still have some assets in less volatile investments and won’t have to sell equities while the market is low.
As you near retirement you want to have more of your assets in the safe bucket to ensure a dip in the market won’t complicate your retirement plans. Those with less than 15 years to retirement will gradually want to reduce the percentage in equities and increase the percentage in fixed income. That allows for a portion of their money to still grow to ensure they are provided for during their hopefully long retirement. At the same time, they will have enough money in their safe bucket to ensure they can pay for their needs during the year without selling stocks if the market has a decline.
As you can see simple words like “safe” and “risk” become a lot more complicated when it comes to investing. If you have questions or concerns about your assets or investments feel free to reach out and contact us today. We would be happy to provide you a complimentary consultation to help you “Get a Plan and Retire Right!”
