blog post 3/1/2016

Risk/Reward and Planning

Any human activity is tied to risk. Walk outside your home in the morning and who knows, you might slip on a crack in the sidewalk. Or, you might cross the street and get hit by a car. Those things do not sound appealing. At the same time, if we do not venture out of our homes, we cannot appreciate the beauty and possibilities of the world around us.

There is another point we should take into consideration. I have heard, from time to time, that most accidents take place in the home. If that is true, perhaps we are safest when we leave our homes. That seems counterintuitive, but it just might be the case.

When it comes to investing, there is no such thing as a risk free investment. This is true even if what we put our money into works as we think it will. Why, because of something called the opportunity cost. When we put money into one investment vehicle, we are foregoing the opportunity we had to do something else with that money. Who knows, maybe we could have made more money investing in something else.

We are always at risk doing one thing, that risk being that we might have been able to do something better.

A mature individual, someone who has developed some wisdom during their tenure on earth, comes to terms with the concept of opportunity cost. As we develop an understanding of the human condition, we come to know that we cannot do all things. Choices must be made. This is certainly true when it comes to investing.

Aside from opportunity cost, there is risk of loss even in investments we believe are not inherently risky. For example, if we put our money in an FDIC insured bank account, we might feel what we are doing is without risk. However, what we are promised is that we will get our money back, up to $250,000. What is not promised is the buying power of that money.

If I put money in the bank and took it out in five years, only to have half my buying power, I would not be happy. Is this likely to happen? I do not have a crystal ball. Yet, there have been times when nations have fallen prey to strong inflation.

Might we find relief from risk? Is there something we can do to abate risk? Again, anytime we make an investment there is a risk. Period! There is no way around that. However, if we craft an investment portfolio with a variety of components, if we diversify among and within asset classes, if we invest in such a way that the performance of our investments do not all track together, then we might not be relieved from risk, but we will be better off than those folks who put all their eggs in one basket or simply make their investments willy-nilly, that is to say without a plan.

Focus, planning, a good tolerance to frustration and well-reasoned action can help us toward achieving the goal of having a better life for our families and ourselves, now and in the future. We need not be held hostage by risk. We simply need to take it into consideration when planning.

Scott McGimpsey- March 2016

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC