Tag Archives: risk

Is your retirement plan a ticking time bomb?

In your mind’s eye, how do you see yourself living retirement?  Does it include the activities that you enjoy now … without the time you spend at work?  When you have the time, do you see yourself seeing the world?  Retirement presents an opportunity for some life-changing experiences.

But there are a few things that can cause those retirement dreams to become nightmares.

If your retirement plan includes a pension, you may want to consider the risk.  It is a fact that many private and public pension plans are sadly underfunded.  Some public pension plans are the worst offenders.  As an extreme example, the Illinois General Assembly Retirement System is only 13.5% funded.

A long period of very low interest rates means that pension plans with large bond investments have generated low returns.  It has caused others to take greater risk.  At some point that can affect the pensions of those who believed their Golden Years were paid for.

Living longer than you expected is another risk.  In 1950 the average life expectancy was 68.  That meant that the average worker retired at age 65 and died three years later.

Sixty years later, in 2010, the average life expectancy was 79 and many people are living longer.  In 2010 there were 1.9 million people over age 90 and three quarters of those were women.  One of the biggest concerns that retired people have is running out of money as savings are eroded by inflation.    How would living past age 90 affect your retirement plans?

The third thing that is causing the average worker concern about retiring is insufficient savings.  Fewer people are covered by pension plans.  Many employers have replaced guaranteed pensions called “Define Benefit Plans” with 401(k)s and 403(b)s known as “Defined Contribution Plans.”  This transfers the responsibility for retirement from the employer to the employee.  Too few people are taking advantage of these programs, not saving enough, and making unwise investment choices.  This can result in insufficient savings when the time comes to actually retire.  One result is that more and more people continue to work well past the traditional retirement age of 65.

What is to be done?

We have to accept a greater responsibility for our own retirement.  We have to be honest about how safe those pension promises are, whether we work of a large corporation or for a government entity.  We have to start saving early and make wise investment choices.  One of the wisest things people do as they prepare for retirement is get the services of a competent retirement professional who will guide them to a safe haven at the end of the road.

 

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Piracy risk

Image Credits: nautilusint.org

Most of us are aware of the risks we take every day, but we ran across an interesting article recently that involved a risk we had not considered: being captured by pirates.

Believe it or not, in certain parts of the world, it’s happening.

Impoverished areas dotting the coasts of Nigeria, Somalia, Malaysia, Indonesia and the Philippines have been virtual breeding grounds for partially-organized collections of criminals seeking to steal, hijack, kidnap and murder their way to fortune.

We have seen news reports of pirates attacking oil tankers and holding them for ransom.  The peak of this occurred in 2011.  Since then, shippers have improved security, hired armed escorts and received military assistance.

 This modern era of the 21st century pirate is being successfully stunted, yet maritime kidnappings for ransom are on the rise. Although the number of pirate attacks is decreasing throughout the world, the number of kidnappings taking place during those attacks is increasing. Internationally, pirates kidnapped 62 persons in 2016, all of whom were or are still being held for ransom.

Pirates realized that it’s easier to capture people and spirit them away that to deal with ships that can’t be hidden.  People are smaller and pound-for-pound a great deal more valuable.  So we now have a new growth industry: Kidnap and Ransom (K&R) Insurance. If you are planning to travel to the pirate infested waters of Southeast Asia or off the coast of Africa you may want to check out the rates for K&R insurance.  For a premium you’ll get unlimited funding for a crisis response team whose sole mission is to get you safely home.

If you plan to take your yacht through the South China Sea or the Malaccan Straights this is something you may want to consider.

Meanwhile, in this part of the world, we’ll keep an eye on the risks with which we are more familiar: market fluctuations, tax changes, interest rate increases, economic trends and even those things we can’t foresee known as Black Swans.   Stay safe.

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A reader asks: what’s the difference between risk tolerance and risk capacity?

Korving -1016 RET web

That’s an interesting question and it depends on who you ask.  The investment industry measures risk in terms of volatility, taking the opportunity for both gains and losses into consideration.

I will answer with a focus on losses rather than gains because, for most people, risk implies the chance that they will lose money rather than make money.

 Risk tolerance is your emotional capacity to withstand losses without panicking.  For example, during the financial crisis of 2008 – 2009 people with a low or modest risk tolerance, who saw their investment portfolios decline by as much as 50% because they were heavily invested in stocks, sold out and did not recoup their losses when the stock market recovered.  Their risk tolerance was not aligned with the risk they were taking in their portfolio.  In many cases they were not aware of the risks they were taking because they had been lulled by the gains they had experienced in the prior years.

People who bought homes in the run-up to the real estate crash of 2008 were unaware of the risk they were taking because they believed that home prices would always go up.  When prices plunged they were left with properties that were worth less than the mortgage they owed.

This exposed them to the issue of risk capacity.

Risk capacity is your ability to absorb losses without affecting your lifestyle.  The wealthy have the capacity to lose thousands, millions, or even billions of dollars.  Jeff Bezos, founder of Amazon, recently lost $6 billion dollars in a few hours when his company’s stock dropped dramatically.  Despite this loss,  he was still worth over $56 billion.    His risk capacity is orders of magnitude greater than most people’s net worth.

The unlucky home buyer who bought a house at an inflated price using creative financing found out that the losses they faced exceeded their net worth.  As a result many people lost their homes and many declared bankruptcy.

There are some new tools available to measure your risk tolerance and determine how well your portfolio is aligned with your risk number.  Click HERE to get your risk number.

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What’s Your Risk Number?

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Defining how much risk someone is willing to take can be difficult.  But in the investment world it’s critical.

Fear of risk keeps a lot of people away from investing their money, leaving them at the mercy of the banks and the people at the Federal Reserve.  The Fed has kept interest rates near zero for years, hoping that low rates will cause a rebound in the economy.  The downside of this policy is that traditional savings methods (saving accounts, CDs, buy & hold Treasuries) yield almost no growth.

Investors who are unsure of their risk tolerance and those who completely misjudge it are never quite sure if they are properly invested.  Fearing losses, they may put too much of their funds into “safe” investments, passing up chances to grow their money at more reasonable rates.  Then, fearing that they’ll miss all the upside potential, they get back into more “risky” investments and wind up investing too aggressively.  Then when the markets pull back, they end up pulling the plug, selling at market bottoms, locking in horrible losses, and sitting out the next market recovery until the market “feels safe” again to reinvest near the top and repeating the cycle.

There is a new tool available that help people define their personal “risk number.”

What is your risk number?

Your risk number defines how much risk you are prepared to take by walking you through several market scenarios, asking you to select which scenarios you are more comfortable with.     Let’s say that you have a $100,000 portfolio and in one scenario it could decline to $80,000 in a Bear Market or grow to $130,000 in a Bull Market, in another scenario it could decline to $70,000 or grow to $140,000, and in the third scenario it could decline to $90,000 or grow to $110,000.  Based on your responses, to the various scenarios, the system will generate your risk number.

How can you use that information?

If you are already an investor, you can determine whether you are taking an appropriate level of risk in your portfolio.  If the risk in your portfolio is much greater than your risk number, you can adjust your portfolio to become more conservative.  On the other hand, if you are more risk tolerant and you find that your portfolio is invested too conservatively, you can make adjustments to become less conservative.

Finding your risk number allows you to align your portfolio with your risk tolerance and achieve your personal financial goals.

To find out what your risk number is, click here .

 

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A Reflection on Risk

The beginning of 2016 was, we are told, the worst first week of the year in the history of the stock market. How bad was it? The DJIA was down -6.13%. While there’s no denying that it was an incredibly unpleasant start to the year, in a broader sense the magnitude of the decline is not unprecedented when you consider that since 1997 we have had 6 single-day drops that have been larger than that. In fact, during our own investment career we’ve experienced much worse. Some of you will remember October 19th, 1987, the day that the market dropped 22.6%. In one day. Within 14 months of that day, the market had recouped all of its losses, and then went on to far greater heights (remember the bull markets of the 1990s?).

However, extreme market volatility usually causes people – especially those who have been complacent, or who have not paid attention to the amount of risk they are taking – to let emotion take over and cloud their thinking. The price of oil has plummeted in the last year, and while that has been great news at the pump, it has caused the majority of oil-related stocks to decline. Railroad stocks have come under pressure as coal shipments have declined. Technology stocks have been affected by a cutback in production of Apple phones.

We are not in the business of predicting the future. However, we will say that we have faith in the strength of free enterprise to overcome economic obstacles. We are in the business of creating diversified portfolios designed to reduce risk so that whatever market conditions we may face, we will be able to take advantage of market advances and cushion market declines.

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The “Bad Timing” risk to your retirement

One of the biggest things that create problems for people who retire is a market decline at the wrong time …. just as they retire.

The reason is easy to understand.

Retirement usually corresponds to the time people have gathered the most assets. Let’s assume that the retiree has managed to gather a million dollars. If this money is fully invested in the stock market and the market goes down 50%, he’s lost $500,000. Suddenly half the money he’s put aside has evaporated, just as he started on his retirement journey. If this happens the retiree may run out of money much earlier than planned.

This is referred to as “sequence of returns” risk. It applies to the time people begin to withdraw their money to fund their retirement dreams. One pension consultant believes that there is a 10 year period when this risk is greatest: five years before retirement and five years after. This is the time when portfolio balances are highest and the amounts of money that can be lost are greatest.

In contrast, a big loss at the beginning of the time we begin to save has much less impact. Simply put, if we put $2000 aside to begin our savings journey to retirement, a 50% loss is only $1000. That’s a lot less damaging than losing the same percentage of a million dollars. Plus we have much less time to make it back.

That’s why “sequence of returns” has very little impact when we’re accumulating assets, but a big impact when we’re taking money out.

Risk control is important at all stages of life, but especially as we’re near – on into – retirement.

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It took 15 years, but the NASDAQ is back.

Fifteen years after it soared to its peak at the height of the dot-com era, the Nasdaq Composite Index cruised to a record closing high yesterday.

In the year 2000, the NASDAQ, driven to ridiculous heights by the technology stock bubble (often referred to as the dot.com bubble) collapsed, taking lots of people’s dreams with it.

A spike in stock prices driven by greed collapsed as people fled the technology sector in fear. As an aside, it provided a great opportunity for those who had the courage and skill to find outstanding bargains amidst the rubble.

The tech bubble of the 1990s is a great lesson in investor psychology. When values are driven by hope rather than by reality, people stop being investors and turn into speculators. The sad story of that time is that even mom and pop investors were caught up in the frenzy. And the collapse ruined many plans and some lives.

We read today about how great index investing is. It cheap, it’s effective and it works … until is stops working. Those who bought the NASDAQ index in 2000, if they had the fortitude to stick it out, would have found themselves breaking even after 15 years of being financially under water.

A good investment strategy always looks at risk. We know that “trees do not grow to the sky” and things that look too good to be true … are not. The first rule of making money is not losing it.

Our investment philosophy is focused on risk control. What that means in real terms is that when the market takes one of its periodic tumbles, it won’t take us 15 years to get even.

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