Home' Trinidad and Tobago Guardian : July 27th 2014 Contents SBG22 PERSONAL FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JULY 27 • 2014
My friend Mike grabbed
my arm as he barged
into the conversation I
was having with some
"What I really want to know, is where do
you think I should invest now?"
I could have given him the usual answer---
that I m not a financial adviser and that I
don t pick investments for people---but instead
I answered his question this way:
"That may be what you want to know, but
what you need to know first is: what s your
greatest financial fear? "
Mike, a pilot, immediately answered that
he s worried about another layoff. Chris, to
his right, is scared of the market having a
repeat of the meltdowns he saw in 2000 and
2008. Bob said he worries about outliving his
money or needing long-term care.
And so it went for a few minutes, each guy
coming up with a few legitimate things to fear,
or nodding in agreement with the concerns
cited by someone else, as the worries ran from
current socio-economic events to providing
for a special-needs child, to fear of missing
out on the market s gains, to not being able
to pay to put the kids through college and
Finally, Mike said, "Maybe you just say that
what I fear the most is losing money or mis-
The problem with all of these concerns is
that even if you work to solve your biggest
fear, you may still feel vulnerable to other wor-
If losing money in the market is your biggest
fear and you go to all cash in response, you
assuage the big worry, but over time you will
have a growing scare that your money isn t
keeping pace with inflation or, perhaps, that
you will outlive your nest egg.
Moreover, if you take that kind of all-or-
nothing position, having everything in cash
could leave you afraid that if the market doesn t
have a comeuppance soon, you ve lost real
opportunities to grow your savings.
While an individual s financial fears morph
and evolve, risks don t. Certain dangers may
be more or less present based on current events
and conditions, but the underlying risks don t
As a result, it s important for investors to
see how their worries align with the various
types of risk.
Market risk , or "principal risk" is the chance
that a downturn (or a bad investment) chews
up your money. It s there for both stocks and
bonds---when interest rates rise, bondholders
will see the market value of their paper shrink---
and for most people it s the big bugaboo.
Inflation or purchasing-power risk for most
people is the "risk of avoiding risk"---the oppo-
site end of the spectrum from market risk---
the possibility that you are too conservative
and your money can t grow fast enough to
keep pace with inflation.
Interest-rate risk generally revolves around
how rates will change. If you seek a long-term
"risk-free return" by putting your money in
a bank certificate of deposit, you face the
chance that interest rates rise and your assets
are stuck at what has become a below-average
rate of return.
Shortfall risk is about you, personally, more
than the market; it s the chance that you won t
have enough money to make your goals. You
can face shortfall risk by being either too con-
servative or too aggressive; if you don t believe
your portfolio can deliver enough, the best
way to address this risk is to save more.
Special-situation risk involves your life as
well, whether it s the special-needs case, plan-
ning for college, saving for a big event like a
wedding or something else.
Most parents get to a point when paying
for college is a key concern---a worry that dis-
tracts them from saving more for their own
retirement---but those circumstances eventually
A close cousin is timing risk, another highly
personal factor that hinges on your time hori-
zon. While experts agree that the chance that
stocks will make money over the next two
decades is high, the prospects for the next
two years are murky; if you need your money
in two years, you have a worry about timing.
Liquidity risk affects everything from junk
bonds to foreign stocks. On a broad scale, it
can be the chance that investments in a par-
ticular country suffer during some sort of
credit crisis, or the potential for a thinly-traded
stock to crater or for its shares to be difficult
to redeem in a crisis. It also occurs in invest-
ment products like non-traded REITs, where
the investment cannot be sold at its perceived
value if the money is needed on a moment s
Political risk is the prospect that government
decisions will damage the value of your invest-
ments. Whether it s the safety of Social Secu-
rity, the impacts of a policy like Obamacare
and how it might affect stocks in your portfolio,
tax-law changes or more, this is the chance
that broad policy decisions hit home.
Societal risk is ultra-big picture, looking at
world events. This is what might happen in
the event of terrorist attacks, war or catas-
Diversification, of course, involves taking
on some or all of these risks, so that no concern
comes up and ruins you.
But that s also why you can figure out where
to invest "now" by considering your biggest
financial worry and playing to that particular
type of risk.
Depending on circumstances and your
nerves, the best move might be staying in cash
and building emergency savings, or it could
be exploring micro-cap stocks or emerging
In short, the answer for every guy in that
conversation could be different, as it could be
if you, your friends, family and co-workers
tried to determine "where it s best to invest
When you want to know where to invest
"next," re-evaluate your situation and, again,
adjust based on your concerns at that point.
It may mean that whatever you do now
won t be the choice that makes the most profit
or that generates the hottest return, but it
does mean that your actions should increase
your ability to sleep at night. And that s a win
--- no matter what the market does next.
Chuck Jaffe is a senior MarketWatch
columnist. His work appears in many US
newspapers. Follow him on Twitter
What do you own and what do you owe?
To figure out where you stand financially,
you need to know your net worth --- and yet
that number is surprisingly difficult to cal-
Your assets are more than just your home
and your investments, while your liabilities
extend beyond your mortgage and other debts.
Drawing up a personal balance sheet listing
your assets and liabilities? Here are three key
items you ought to include:
If you re under age 50 and gainfully
employed, your most valuable asset is probably
your human capital---your ability to pull in a
paycheck. It is well established that a university
graduate who works full time for 40 years
might have lifetime earnings of $2.4 million,
while someone with a professional degree,
such as a doctor or lawyer, might earn $4.2
Your human capital should heavily influence
how you handle your larger financial life. For
instance, to protect your human capital, you
likely need health, disability and life insurance.
Suppose you go under the proverbial bus or,
alternatively, go under the bus but survive. In
either situation, the right insurance can help
your family cope.
Early in your adult life, you might take on
a heap of debt, including student loans, car
loans and mortgages. Reckless? Arguably, it s
By borrowing, you can purchase items you
can t currently afford, thus smoothing out
your consumption over your lifetime. With
any luck, you will have years of paychecks
ahead of you, so you can service these debts
and eventually retire debt-free.
Your human capital is also the rationale
behind investing heavily in stocks when you re
younger. Think of your regular paycheck as
akin to receiving interest from a bond. To
diversify your big human capital "bond," you
might devote your portfolio mostly to stocks.
But as you approach retirement and your last
paycheck, you should shift maybe half your
portfolio into bonds, so you have investment
income to replace the lost income from your
Don t have quite enough saved for retire-
ment? You could always continue to make use
of your human capital by working a few days
Imagine you can make US$16,000 a year
working part time in retirement. Based on the
often-recommended 4.0 per cent portfolio
withdrawal rate, that part-time work is like
having a nest egg that s $400,000 larger.
When you add up the assets you have avail-
Nine financial risks
How to calculate your personal balance sheet
Continued on Page 23
Your human capital
should heavily influence
how you handle your
larger financial life.
Links Archive July 26th 2014 July 28th 2014 Navigation Previous Page Next Page