It is common to have a very traditional interpretation when we think of investment risk, such as the belief that stocks are seen as a risky investment, and bonds less so. But many issues have come to light in the past decade that cause us to think about risk differently. For example, there’s the risk of outliving your retirement savings, which is often cited as one of the primary concerns of today’s retirees.1
And that’s just today’s retirees. If you’re still in saving mode, your retirement could be even longer than today’s average retirement.2 Given this potential reality, it may be time for all of us to re-evaluate how we assess risk.
As financial advisors, we spend countless hours helping people develop a financial strategy for the future. That means we continuously research and discuss risk factors, and we understand how to apply them to each individual’s situation. Please contact us if you’d like help assessing what risk factors you need to consider in regard to your long-term financial goals.
Some people are naturally risk averse, and others are enthusiastic risk-takers. Most fall somewhere in between, with attitudes toward risk changing, depending on where they are in in their lives. It’s not uncommon for individuals to take more risks in their younger years, when they have more time to rebound from market setbacks, and then take a more conservative approach as they near retirement.3
If we pursue a strict risk/reward investment strategy, we can still come up short in meeting retirement goals. For example, say you are extremely risk-averse, so you invest all of your money in 10-year Treasury notes in order to generate around $56,500, which is the average annual household income. These securities, which are considered low risk because they are backed by the U.S. government, were paying out around 2.25 percent in October, so you would need to have $2.26 million invested to earn that much – even more if you factor in long-term inflation.4 In this particular scenario, we might say that such a level of risk-aversion is a luxury many of us cannot afford.
Let’s look at another type of risk. As a general rule of thumb, risk-averse U.S. investors are more comfortable investing in domestic stocks versus those in other countries. This year, that’s working out pretty well, when you consider that the S&P 500 boasted a 14.86 percent year-to-date return as of Nov. 2, 2017.5 However, a lot of countries are doing well these days, so diversifying to include foreign stocks could help improve a portfolio’s overall return while adding the risk-mitigation factor of broader diversification. To put this in perspective, consider that the MSCI World ex USA Index has yielded 15.51 percent and the MSCI Emerging Markets Index is at 25.08 percent for the year as of Sept. 27, 2017.6
When discussing risk and your financial goals, it’s important to evaluate all different kinds of risk beyond that associated with individual holdings. There’s the potential risk of not keeping pace with long-term inflation’s impact on the purchasing power of our savings. There’s what’s called “sequence of returns” risk, which means your average annual return over a long timeline may be good, but if you experience declines during the beginning of your retirement years, the risk of loss is much higher.7
There’s also the risk of having significant health problems and needing long-term care. Some people experience this while others don’t, but there’s no way to be sure which camp we’ll fall into – so that’s a potential risk.
While many retirees may believe that their greatest risk is not accumulating a certain amount of money by the time they retire, we believe their goal should be to create a financial strategy that reflects their needs and objectives instead of chasing an arbitrary monetary amount.
Content prepared by Kara Stefan Communications.
1 Catey Hill. MarketWatch. July 21, 2016. “Older People Fear This More Than Death.” http://www.marketwatch.com/story/older-people-fear-this-more-than-death-2016-07-18. Accessed Oct. 24, 2017.
2 Jeff Stimpson. Forbes. Sept. 5, 2017. “How to Balance Investment Risk and Reward in Retirement” https://www.forbes.com/sites/nextavenue/2017/09/05/how-to-balance-investment-risk-and-reward-in-retirement/#629608b96ec4. Accessed Sept. 28, 2017.
3 Walter Updegrave. CNN Money. June 21, 2017. “How much investing risk should you take in retirement? http://money.cnn.com/2017/06/21/pf/retirement-investing-risk/index.html. Accessed Oct. 24, 2017.
4 Bruce McCain. Forbes. Sept. 20, 2017. “Seeking Financial Security When Life Changes Strike.” https://www.forbes.com/sites/brucemccain/2017/09/20/seeking-financial-security-when-life-changes-strike/#589a300c2f0a. Accessed Sept. 28, 2017.
5 CNN Money. Oct. 24, 2017. “S&P 500 Index.” http://money.cnn.com/data/markets/sandp/. Accessed Nov. 2, 2017.
6 eTrade. Sept. 28, 2017. “International calling.” https://us.etrade.com/knowledge/markets-news/commentary-and-insights/international-calling?ch_id=S&s_id=Twitter&c_id=ESOC. Accessed Sept. 28, 2017.
7 Dana Anspach. The Balance. Aug. 14, 2017. “Learn How Sequence Risk Impacts Your Retirement Money.” https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672. Accessed Oct. 24, 2017.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.