After another bruising month in October for the stock market, the term risk has been on everyone’s mind lately.  The risk is doing nothing and things get worse or you move your money to cash and the market goes back up, and you miss out on the recovery.  Webster’s defines risk as a hazard: a source of danger; a possibility of incurring loss or misfortune.  There are a lot of other risks that you need to know about so you can protect your money.  Plus, there are steps you can take to get your risk under control.

No-risk investments still have risk

We’ve heard from a lot of people in the last few weeks that say they don’t want anything to do with the stock market anymore and they either have moved or are about to move ALL of their money to cash or other fixed investments. Although, this may make you feel better, it may not be a smart move with all of your money. Don’t get me wrong, it’s a good idea to have some safe money for current needs and emergencies. Yet for your long- term money, what you need to remember is even on no-risk investments you still will need to pay taxes on your earnings, and oh yeah, there’s still something called inflation out there that will eat into your buying power. Let’s say you buy a fixed investment that earns 4 percent, if you subtract 1 percent for taxes (assuming a 25 percent tax bracket) and 4.64 percent for inflation, you are still losing.

Emotional risk

Study after study shows that the average investor consistently underperforms the stock market returns over time.

In our opinion, it’s because many investors let their emotions, fear and greed, get in the way and the average investor tends to sell and buy at the wrong time. To make money in the stock market the basics are pretty simple, buy low and sell high. Yet, in reality it’s very hard to do if you rely on your “gut.” We hear all kinds of excuses, “It is different this time,” “I’m going to wait till we bottom out,” “let’s wait till things get better,” etc.  Who in their right mind wants to buy stocks when prices are plummeting?  Warren Buffett does!  In fact, he has been buying billions lately. So what does Warren know that most other Americans don’t know?

Put the odds in your favor

The casino industry has been using a technology called Monte Carlo for years to stack the deck of cards in their favor.  Monte Carlo analysis looks at the random possibilities of various occurrences.  It helps you determine the outcome based upon a variety of different scenarios. This same technology can be used when you want to calculate the probability of success in your retirement account.  Then what you can do is optimize your retirement accounts to work toward increasing the chances of success. Using a calculated formula can also help you remove your human emotions of investing and put a system in place that tells you what to buy, when to buy and more importantly when to sell.

What risks are you concerned about?

In today’s society it seems there is risk in about everything you do. Just remember there are certain risks you can control and others you cannot control.  Too often people get all upset and worry too much about things that they cannot control.  At this point you can’t control what the next president is going to do; you can’t control what is going to happen to taxes; and you can’t control the stock market.  The markets and interest rates will go up and they will go down. These are all things you can’t control.  What you can control is what steps you take to reduce or eliminate certain risk and increase the odds of your success. You can control your own personal financial situation.  So take action now! Do not wait. Call a qualified financial professional today and optimize your plan for a better chance of success. Those who have the best chance of success in today’s economic uncertainty are those who implement a plan and not panic. You can do it; you deserve victory!

For more information about this column and The Retirement Guys, tune in every Saturday at noon on 1230 WCWA and every Sunday at 11 a.m. on 1370 WSPD or visit www.retirementguysradio.com.  Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  7135 Sylvania Ave, 2B.

This entry was posted on Thursday, November 13th, 2008 at 9:48 pm and is filed under Retirement Guys, Toledo Business Link.
You can follow any responses to this entry through the RSS 2.0 feed.
You can skip to the end and leave a response. Pinging is currently not allowed.