Am I Taking Too Much Risk?

Financial Advisor Teresa Bear sheds light on the financial risks you could be taking, and are unaware of.

Phoenix, AZ. – Retirees and those soon to be retired are struggling to figure out what amount of risk is really acceptable for them in these turbulent economic times.  Plus, the whole idea of diversification and risk management are proving to be more complex than originally thought.  If these are questions you have been struggling with, then Teresa Bear may provide you with some simple straightforward guidance on how to navigate these tricky economic times.

“Financial loss associated with taking risk is often overlooked by folks who are exposed to financial markets,” said Teresa Bear, President of JC Grason of Mesa, LLC.

Let’s start with “the math” and explain the realities of loss.

“As you can see, it takes MORE gain to recover from a loss than the original loss itself,” said Teresa. “This seems illogical, so let’s walk through a simple illustration:

If you have $100,000 invested into a mutual fund and that fund experiences a 20% loss, the resulting value on your next statement from the mutual fund company will show an account value of $80,000.

So, will a 20% gain get you back to even?  No.  Let’s crunch the numbers:

$80,000 x 20% = $16,000

$80,000 + $16,000 gain = $96,000 ($4,000 LESS than your original investment)

As we get older, our time horizon gets less tolerant to market losses due to the amount of time it may take to get a significant double-digit return just to get back our own money.”

The best defense to market losses is often thought to be proper asset allocation and diversification.

“I agree that risk can be mitigated by where you put your money, but, often, diversification is done by buying multiple funds all exposed to the same market risk and really providing little cushion to the economic risks associated with investing in the market,” said Teresa.

In the past, there was a rule of thumb that you should allocate your age to safe savings vehicles like CDs, bank accounts and find insurance company products like cash value life insurance and/or annuities.

As an example, a 65-year old couple using this formula would put 65% of their money into these safe vehicles and allocate only 35% of their assets to risk.  So, the risk assets are calculated by taking 100 minus your age.

But some experts think that old rule may be too risky for many retirees. A recent findings, like that recently published by the Putnam Institute, concluded (as reported in MarketWatch July 11, 2011 article: Retirees Need Less Stocks, More Annuities) “Retirees should invest just 5% to 25% of their portfolio in stocks, or at least that’s the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals.”

Teresa agrees with the Putnam study.  She said “It’s important that retirees don’t run out of money in their retirement years.  When you are drawing income from your portfolio a large drop in your stock values can force you to move to a new neighborhood – you may have to move in with your kids!  It’s important to build plans to provide income as long as you live”.

For more information on how Teresa Bear can help, please visit http://www.teresabear.com. 

For media inquiries only, please contact Jenn Horner at [email protected].

About Teresa Bear:

Teresa Bear is the President of JC Grason of Mesa, LLC and specializes in retirement planning and asset preservation for retirees and their loved ones. She has been a Certified Public Accountant practicing in the area of taxation for more than 25 years and is also a Certified Financial Planner ™.  She is also an Investment Advisor Representative with Brookstone Capital Management LLC, a SEC Registered Investment Advisor.

Teresa is a graduate of Graceland University in Iowa and has an MBA from the University of Kansas. She is also the author of the book She Retired Happily Ever After. Teresa has been featured in the USA Today.