What is Risk?

What is Risk?

TRUE TALK FINANCE BY RUDY EIDENBOCK

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I get the following declaration from clients all the time regarding their investments, “I don’t want anything risky!!!” This is a normal reaction to any investment opportunity that is presented to the public. But do you know what risk really is? The online encyclopedia Wikipedia defines risk as “the potential of gaining or losing something of value. Values (such as physical health, social status, emotional well-being or financial wealth) can be gained or lost when taking risk resulting from a given action or inaction, foreseen or unforeseen. Risk can also be defined as the intentional interaction with uncertainty. Uncertainty is a potential, unpredictable, and uncontrollable outcome; risk is a consequence of action taken in spite of uncertainty.”

 
In most cases, you worked hard for the money that you wish to set aside for some future need or want. To desire a ‘safe’ investment is almost basic human nature.

 
Most people steer away from what they perceive to be risky investments into what they perceive to be safe investments not realizing that there is no 100% safe place to put your money in our economy. There, I said it! Everything has risk and I challenge my clients all the time to name a truly ‘safe’ investment. They never can. I challenge you to do the same and I’ll bet you can’t.
Some of the more commonly known risks with investments are as follows:

  • Stocks – market, emotional and economic risk
  • Bonds- interest rate, inflation and credit risk
  • Mutual Funds-in addition to market, emotional and economic risk as with stocks, there is management risk
  • Annuities-credit worthiness of the issuing company as well as management and market risk

 

These are just a few examples. I could go on at length.
I have been told by some clients, ‘Well I’ll just put my money in the bank. That’s as safe as you can get.’

 
Wrong! Bank obligations carry their own set of risks. You have no control over what interest rate you will get on your money, (usually next to nothing). You have inflation risk which is a huge but what I refer to as an invisible risk. The reason being is that yes your deposit will always remain the same if you don’t touch it, but you will only be able to buy less and less goods or services with it as the years go by. And inflation almost NEVER goes away. But, you say, these accounts are FDIC insured. How can you go wrong with that? Remember that the Federal Deposit Insurance Corporation is a government sponsored corporation created back in the 1930’s to insure deposits of banking institutions in the event of insolvency. What if the government decides to no longer honor their obligation to insure those deposits? That is what is known as political risk.

 
Ok, so what’s left? How about gold and or real estate? Or, more broadly-tangible investments. If the economy completely falls apart and shuts down gold can be a good asset to hold. However, its price can fluctuate more wildly than stocks. It historically has been a poor growth investment over the long term. As for real estate, the market meltdown of 2008 is proof enough that real estate is not a safe, foolproof guaranteed investment.

 
“Alrighty then,” my clients have told me…They will just put cash in their safe deposit box or under their mattress. I must point out that while more people do this than you might think, it also has its risks. The main risk is that your money is not working for you earning a return. This is what’s known as opportunity risk. There is also inflation risk. Again your money consistently buys less and less goods and services.

 
So what to do? I know so far I have been all doom and gloom when it comes to risk to your hard earned money. But the news is actually more good than bad. Most financial advisors will tell you that while it is impossible to eliminate risk, it is very possible to manage it effectively.

 
The first strategy to managing and helping to reduce risk is diversification. As the old saying goes, don’t put all your eggs in one basket, spread your money around.

 
Also, a balanced portfolio is a key factor in managing risk. Basically you want to have your assets positioned in such a way as to be able to be making money somewhere no matter what is happening in the economy. This I can assist you with. This is more commonly known as asset allocation with negative correlation of your assets. This is technical jargon outlining the principle that if one asset falls in value it does not drag your other assets down with it. My job as a Financial Advisor is to custom design a client’s portfolio so as to help achieve this critical objective.

 
So, risk is not something you need to fear when it comes to managing your money effectively. Using the proper tools and strategies can help you feel confident about knowing where your money is.

 
If you have any questions about this article or need assistance with your money matters, don’t hesitate to contact me at 480-296-9556.
Rudy Eidenbock, Financial Advisor, RJFS, Office: 480-307-9909, Cell:480-295-9556, Fax: 480-907-1413, 4111 E. Valley Auto Dr. #104, Mesa, Arizona 85206, www.puritywealthadvisors.com, rudy.eidenbock@raymondjames.com
Purity Wealth Advisors is an independent firm. Securities offered through Raymond James Financial Services Inc. Member FINRA/SIPC
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Diversification and asset allocation do not ensure a profit or protect against a loss.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Rudy Eidenbock and not necessarily those of Raymond James.

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