Let’s make this easy. All human endeavors carry some degree of risk. Investing is a human endeavor. Investing carries some degree of risk. Now, certain forms of investing are riskier than others, but I want to be clear, every form of investing exposes the person investing to some risk. What is that risk? We will take a look.
Perhaps the most alarming risk that all investments expose us to is the possibility that we can lose all the money that we put into a given investment. I suspect certain individuals might argue that there are investments that do not expose an investor to the loss of their principal. For example, some might say that people who put money into a bank account that is FDIC insured, and is within the threshold amount covered by that insurance, are not at risk for the loss of their principal. I disagree.
I am not knocking the FDIC, far from it. And I do believe that in relative terms, the chance of losing your investment in a savings account or CD that is insured, relative to other investments, is small. The key words to focus on here are “relative to.” Could the United States, one day, find itself in a financial apocalypse in which legislators void certain guarantees on certain investments like money in insured savings accounts? Logic dictates that I must entertain that possibility. Is it likely? I doubt it. However, I must accept that the possibility exists.
In the world of investing, it might be more productive if we contextualized things in relative terms. If we wisely accept that all investing carries some degree of risk, the issue becomes what is the relative risk of one investment compared to another. And this is where things become particularly interesting.
I do not like to downplay risk. I would rather have the maturity to accept that all human endeavors carry some risk and accept that as one of the ground rules of life. Once I have accepted that, I can move on to the practical understanding of risk, which means that I must analyze investments through the prism of comparative risk.
I might be at a very small risk of losing my principal when I put money into a FDIC insured CD. (That could potentially take place, I suppose, in the event of a financial or political cataclysm.) Yet, what about a different risk; the risk of not keeping pace with inflation in that investment? Meaning that the price of goods and services increases at a faster rate than our savings. That seems like a risk that is more likely, doesn’t it?
This is not to say that insured CDs are inappropriate vehicles to put money in. What I am saying is that the different degrees of risk, inherent in different financial vehicles, must be compared in order to come to a series of assessments of what the best way to create an individualized investment portfolio is – or as I like to call it financial mosaic.
Hey, forget inflation for the moment. What if your investment outpaces inflation, somewhat, but underperforms, mightily, compared to all kinds of other investments you could have made? That is not an appealing prospect either, is it?
Risk, risk, risk and more risk is what you can look forward to when it comes to investing. “Oh my peace of mind, where am I to find it?” you might ask. My answer is that peace of mind in the realm of investing comes from a philosophical understanding of the nature of life itself.
The better you plan and save for your future, the better off you will be, specifically if you compare yourself to individuals who did not plan and did not save. Will you still face risk? Sure and loads of it. However, don’t you think that risk will be smaller, in comparative terms, than the risks that the non-savers and non-planners face?
So if an investment is touted as guaranteed, just realize that the guarantee is only as good as the guarantor. And if you feel the guarantor is good, please understand that past performance is no guarantee of future results. “Oh my goodness, what do we do?” we cry out, laden with angst.
What we do is we get real. We accept that life is risky. We accept that investing is risky. However, we also accept that in comparative terms, not planning for the future, not saving for the future, not investing in our future, may well be the greatest risk of all.
Do you have plan for your life? Do you have a plan for your financial future? Do you regularly save money? Do you have a methodology for what you do or is what you do uncoordinated? Do you avoid taking action because of risk, without considering the risk of not taking action? Do you have a trusted financial advisor that you work with? Should you have one?
Consider those questions, then, by the lights of your own logical process and a desire to provide a happy, healthy, sound life for you and your family, take action. Oh, and yes, there will be risk attached.
Scott McGimpsey September 30th , 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