October 2, 2015

Most investors, savers, and workers have no clue how much risk they are exposed to.

By In Blogs, C.Jay Engel

As an investment advisor, I talk to many different potential clients all the time.  Most people have simply stopped caring what is going on in their savings plans –which is what an investment portfolio usually is part of (for those who aren’t terribly wealthy and therefore aren’t gambling their money in the stock markets)– and therefore they haven’t considered whether they are actually on track to meet whatever goals they have in the back of their heads.  I call this the “someday I’ll take care of it” investment strategy.

This is probably not the best strategy.

As such, their personal “risk levels” are remarkably at odds with how they are invested.  Psychologically, many would be financially devastated if these historically towering equity and bond price levels corrected (a nice euphemism for “crashed”).  But they don’t even realize it. They don’t realize they are actually not invested as they would choose to, if they knew.  Unfortunately, especially for those whose portfolios have been managed by employers, their immediate mindset is: “out of sight out of mind.”  (Most people don’t realize– or completely ignore– that when they leave an employer, there are a number of options available to them as to what can be done with 401ks.)

It’s easy to blame the Fed for wrecking havoc on the economy, on savings, on the portfolios of millions who depend on those portfolios for their future when they can no longer work.  They are right to blame the Fed. Money and credit manipulation is what central banks do best; it just so happens that such manipulation affects savers and current and potential retirees the most.  But even in this difficult situation, people need to reflect on their own situation and be proactive about protecting the wealth that they do have.

The first step is to realize exactly how much risk they can take before they are financially devastated, and then responding to the “risk level” by aligning their investment with that risk level.  The first step is to realize the extent to which they are exposed to a financial impact that they are not personally comfortable with.  When financial markets correct back away from their present highs, many people will have not seen it coming. They will be frustrated.  But even if they do not see it coming, the least they can do is limit their potential frustration by minimizing their risk; that is, by matching their current investment’s risk level with their own personal risk level.

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Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com