Traditional pensions are gradually disappearing from American culture. More and more of us will depend on our own investments to cover some or all of our living expenses during our "golden years." Prospective retirees' goals are pretty straightforward: to enjoy a satisfying retirement and to provide a meaningful inheritance for their families.
That dream seemed secure through the '80s and '90s when U.S. investors were enjoying steady double-digit annual returns from both stocks and bonds! But a strange thing happened on the way to retirement ... the world got a lot more dangerous!
You already know that interest rates have become microscopic; so-called "safe" investments like bank accounts and government bonds pay less than the rate of inflation! And, of course, the value of the home that many of us were counting on as a retirement asset has shrunk. Well then, what about stocks, the supposedly highest-return asset class? We've seen stock values cut in half twice in the last 12 years!
Most people who've been looking forward to a happy and secure retirement weren't anticipating these sorts of disappointments! Fear is rising among would-be retirees.
All of which brings us to the subject of this edition of the Blue Sheets: RISK ... specifically, investment risk as it pertains to retirement income security.
Mr. Webster describes RISK as exposure to the possibility of loss or harm.
Very few people actually enjoy risk. But life has taught us that the companion to every decision we make is the possibility that it will not work out as well as we had hoped.
We decide what school to attend, whom we will marry, where we will live, and what sort of work we will do. All of these decisions involve a risk of disappointment or loss; yet we keep making important decisions because, as Melinda Gates said, "We believe in taking risks because that's how you move things along."
And so it is with investing for our retirements. In this edition of The Blue Sheets we will examine with you the various faces of investment risk, and outline the Financial Advantage discipline for managing these risks to a happy outcome.
Risk Needn't Be Scary
When most investors hear the word "risk" they imagine big declines in the market value of their 401(k) or brokerage account. When your account value shrinks month after month, and you're really not sure why, it's easy to imagine that you are just not lucky or that the deck is stacked in favor of the insiders. And a natural instinct is to want out... to stop the pain.