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Managing Risk

October 16, 2014

Investors need to consider calculated risks based on their needs and goals with the understanding that no matter what is done, there will be risk.  Risk avoidance is impossible – what is possible is avoiding certain risks over others. 

Prudent investing requires choosing the risks you feel comfortable with and avoiding the risks you are most uncomfortable with consistent with pre-stated goals.  Uninformed choices of what risks to avoid in many instances will not get you where you want and need to be.

I believe that many of yesterday’s rules regarding risk that suggest that as you get older you need to reduce your equity position in favor of fixed income and reduced bond terms are outdated.  The rules you need to follow are new ones that recognize longer life expectancies, all time low interest rates, an intertwined global economy, almost instant availability of news and individual inflation rates based on older people’s spending patterns.  A husband and wife both 70 have a life expectancy where at least one of them will live 27 years.  A couple at age 75, 23 years and age 80, 18 years.  You can outlive your money if you invest using yesterday’s rules and the feelings and tolerance you had yesterday.  Anyone with a greater than ten year time horizon should consider taking on greater “risk” dictated by the changed conditions.  This can mean longer-term fixed income investing periods or more funds allocated to equities than previously suggested by the old rules.  Properly considered, this can actually come out to be less risky in the long run.

Knowledge, understanding and clear goal-setting also help allay fears and insecurity.

The ultimate test is to understand whether the types and levels of risk you assume will get you to your goals.  If not, then you will need to consider different risks – or change your goals.

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