By Roger Sorensen
Usually the first time investors really notice the risk involved in investing is when they hear about it on the evening news. The Dow moves up or down because of something bad happening somewhere and suddenly investors are nervous.
Risk is now visible.
In reality, the visible risk you read about in the paper or see on television isn’t nearly as dangerous as an invisible risk that doesn’t make the news.
What is invisible risk? It's a risk investors almost never think about, until it is too late.
Invisible Risk #1: Inflation
Inflation is the decrease in purchasing power of a dollar over time. Historically, 3% has been the rate of inflation. This means if you have $100 today, in 25 years it will be the equivalent of about $47. If your investments are “safe” and provide you with a 3% rate of return, you are still losing money because your purchasing power is decreasing. Also, you have to pay taxes on that 3% gain each year as well.
The stock market has returned an average of 10.4%, even with the down years of 2002 & 2003. Compare that to the rate of inflation and you can see how your money can maintain, or improve your purchasing power in the future.
Invisible Risk #2: Conservatism
It is possible to invest in the stock market and still play it too safe. Placing more than a small percentage of your money in accounts granting immediate access to cash, (high liquidity) don’t offer very high returns. These accounts include money market funds, conservative mutual funds, and the like.
Younger investors, pre-50’s, can have as much as 80% of their retirement assets in stocks because they have time to weather the ups and downs of the market. Even older investors should still have 50% of the assets in the stock market. A key to investing successfully is to know and understand your investment style and match your asset allocation to it.
Investment Risk #3: Asset Allocation
About once a year you should rebalance your portfolio of investments. Even the perfect portfolio will become unbalanced over time as stocks split, change in value or whatever else happens to unbalance it.
Rebalancing gives you the opportunity to sell high and buy low or improve your long-term financial picture. Don’t try to be a market timer, that’s short term investment thinking and can lead to some big wins, and some bigger loses.
With the burden of retirement planning on the backs of individuals now more than ever, it is critical investors understand the risks. All the risks – visible and invisible.
Courtesy of
Investing Page - Copyright Roger Sorensen, used with permission
Invisible Investing Risks: Inflation, Conservitism & Allocation
