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Managing Investment Risks

Managing Investment Risks

Nov 2020

In my opinion, it is impossible to predict future stock market returns. Investment models can produce hypothetical returns but they can’t account for future events. So, in my opinion, investors who manage their investments based on market performance or what they perceive as opportunities for better returns have very little control over the outcome.

On the other hand, there may be market risk, interest rate risk, inflation risk and taxation risk. If your investment portfolio is not vulnerable to market risk it may be vulnerable to interest rate or inflation risk. In my opinion, over the long term, taxes may impede returns and portfolio performance. If it were possible to control the risks to your portfolio, then you could try to improve the long-term performance of your investments.

Understanding all Risks

Some investors understand the concept of risk and reward. The risk of loss associated with the stock market is called “market risk”.

In my opinion, the investors who were rattled from the steep declines in the market during the 2008 crash, and more recently in the August 2011 plunge, may have decided they have little tolerance left for market risk, and some of them may have moved their money to “less risky” investments. The problem for these investors is they have now left their portfolio vulnerable to other adverse risks. Effectively managing all of your risks entails allocating your investments along a mix of assets that can act as counter-weights to the various types of risk. * Inflation Risk There is going to be inflation. When there hasn’t been inflation, there could have been deflation or stagflation, which some would consider to more dangerous conditions for investments. When investors shift their assets to low yielding or fixed yield investments to avoid market risk, they may be exposing them to inflation risk.

Interest Rate Risk

We also know that interest rates may rise; and they could fall. Unlike changes in the direction of the stock market, changes in interest rates could come with some forewarning. For instance, when the economy slows down as it has these last few years, the Federal Reserve may lower interest rates to try to stimulate economic activity. Conversely, when the economy begins to overheat, the Feds may increase rates to try to contain inflation. Generally, when interest rates rise, the prices of debt securities decrease, and in a declining interest rate environment their prices will increase.

People who stash their money in fixed yield vehicles could also be vulnerable to interest rate changes.

Taxation Risk

At one time or another, the IRS will collect its share of your investment earnings. But, as imposing as the tax code is, it may allow investors to use means to minimize taxes. Deferring taxes, which can be done using qualified retirement plans and annuities, enables your earnings to compound unimpeded by taxes so they can accumulate more quickly; however, there is usually a tax consequence when you eventually access those funds. Understanding investment taxation, such as capital gains, loss carry forward, investment income, etc., may affect the longterm growth of your assets.

In my opinion, an effective way to manage and potentially minimize investment risks is through the broad diversification of assets under a long-term investment strategy. Investors should consider their long-term objectives and overall tolerance for risk when selecting investments.

* Diversification does not necessarily produce results.

Tags: risk management, investment risks

Securities may be offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services may be offered through NFP Retirement, Inc. Kestra IS is not affiliated with NFP Retirement Inc., a subsidiary of NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

NFP retirement, Kestra IS and Kestra AS do not provide tax or legal advice. For informational purposes only. Please consult with your tax or legal advisor regarding your personal situation.

NFPR-2019-88 ACR#324839 09/19

Understanding Investment Risk

Understanding Investment Risk

Nov 2020

All investors – be they conservative, moderate or aggressive – need to understand that the level of returns they expect to generate is directly related to the amount of risk they are willing to assume – the higher the return, the higher the amount of risk one needs to take. It probably doesn’t dawn on most people that, regardless of where you put your money, you assume some element of risk. For instance, if you focus solely on keeping your money safe from the possibility of loss, you risk not accumulating enough money to meet your goal. In this case, trying to avoid “market risk” increases your exposure to other types of risk, such as “inflation risk” or “longevity risk.”

Essentially, you need risk in order to generate the level of returns you will need to achieve financial independence. However, risks can be managed far more effectively than investment performance. You can’t predict the direction of the financial markets, or which mutual fund will outperform the others; however, you can manage risk and even have it work for you through proper asset allocation and portfolio diversification. While there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, by including a mix of assets and securities that act as counterweights to one another, a risk aware portfolio can potentially help returns wherever they might occur while reducing overall portfolio volatility.

Understanding the different types of risks and how they can individually and collectively impact your long-term investment performance is crucial to constructing a well-conceived portfolio that seeks to maximize your returns while reducing your overall risk.

Different Types of Investment Risk

Market Risk: The risk that most people associate with investing is market risk, the possibility of losing money due to the price fluctuations of the markets. Because it is difficult to know which way prices will move, investors can lose money if the market moves against them. However, losses are only realized if the investment is actually sold.

Inflation Risk: Many risk adverse investors and savers prefer the safety of savings accounts, CDs and government bonds. The risk they face is that the growth of their secured savings doesn’t keep pace with the rate of inflation which will, in effect, reduce the value of their money in the future.

Interest Rate Risk: The prices of interest-bearing securities, such as government and corporate bonds fluctuate in response to the movement of interest rates. As interest rates rise, the prices of these securities will decline. So, it is still possible to lose money. If the bonds are held to maturity, which can be as long as 20 or 30 years, the investor receives the full-face value of the bond.

Taxation Risk: With the possible exception of some tax-exempt bonds, all investments will trigger a tax consequence, either as a result of income earned or capital gains realized from the sale of an investment. Over a long period of time, taxes can adversely impact the return on investment. Additionally, tax laws do change, so if an investment was based on its tax treatment, it could change at some point in the future.

Liquidity Risk: Investors who are concerned with having immediate access to their money need to be aware of liquidity risk. The safest of investments, such as CDs, have some liquidity risk because if it is redeemed too early the investor could lose a part of his principal to early redemption fees. And, even though stocks and bonds can generally be liquidated at any time, investors may be reluctant to do so if they are in a loss position.

When investing, all possible risks should be evaluated against your overall tolerance for risk. The most effective way to manage risk is to invest with your specific goals in mind. Also, having a long-term investment horizon may allow your investments to work through the inevitable down and up cycles of any market.

Tags: risk management, risk, investments

Investment Planning for an Uncertain World

Investment Planning for an Uncertain World

Nov 2020

Chances are good that if you turn on the prime-time news on any given day or pull up your favorite newspaper on your iPad one of the top stories will relate to emerging risks around the world. Whether it’s strife in the Middle East, tensions with Russia, or the ever-shifting balance of power between global powers, this much seems obvious: we live in a time of both unprecedented global complexity and the technological capability to watch events unfold in real time.

Investing in a Time of Geopolitical Risk

When large investment houses start talking about geopolitical risk it’s probably a good idea to take note. Some money manager may not spend time discussing the possibility that foreign policies between countries could lead to destabilizing situations, but at the end of 2014 the chair of RIT Capital Partners (a $3.5 billion fund) issued a statement that geopolitical risk was “…as dangerous as any time we have faced since World War II…”.1

Whether such a dire warning sounds overly pessimistic or not isn’t necessarily the point. What’s important is that it reveals that large money managers are starting to pay a great deal of attention to global risk.

But how to address these risks? Historically, moving 100% into cash or government bonds hasn’t been the best way to achieve growth throughout that last 100 years or so, a period of time that has seen more than its fair share of global instability. Without moving into purely defensive investments and making overly-conservative plans how can you plan for tomorrow while being mindful of risks today?

Managing Risk - and Reward - for Potential Long-Term Success

It’s often said that without risk there is no reward, and when it comes to financial planning this maxim is particularly true. For those trying to achieve long term goals, such as retirement or estate planning, it’s often times risky to try and avoid all risk.

Being overly risk-averse toward stocks can result in low returns that hardly keep up with inflation, which may in turn increase the risk of running out of money before you die or failing to fully fund an estate. For some investors cash and bonds alone don’t offer the inflation-beating returns needed to replace an income or provide a legacy to the next generation.

Fortunately, a smart financial plan, built in a way that takes into account global risks but still seeks long term growth, can help avoid these overly-cautious decision biases.

Is Your Plan Risk – and Reward – Aware?

With all the uncertainty in the news now is a great time to evaluate your financial plan to see if its managing risks in a smart way.

Does your plan:

  • Ignore the relationship between reward (investments) and risk management (insurance), or does it address both investments and insurance in a comprehensive way?
  • Diversify investments and insurance to provide multiple sources of return and income?
  • React to the latest headlines or take emotion out of the decision-making process?
  • Rely too much on one company or country? (Note: If your pension, 401k, and life insurance are all provided by your employer or heavily invested in one country this can be a big risk.)

The best way to be sure your plan is well prepared for the risks and rewards of the global economy is to talk with a professional planner today.

After all, wouldn’t it be nice to watch or read the news and not worry about the negative headlines because you know you’ve got the right plan – and the right planner – on your side.

Tags: risk management, investment management

Debt and Retirement - How to Handle both when Nearing Retirement

Debt and Retirement - How to Handle both when Nearing Retirement

Nov 2020

An increasing number of Americans are facing an uphill battle just trying to save enough and earn enough on their savings to be able to retire on time. Carrying much higher debt burdens than previous generations, many pre-retirees have had to put their savings on the back burner to focus on debt reduction, which, for practical purposes is smart, but it is also the primary reason why some will need to delay retirement or drastically downsize their retirement lifestyle. In retirement, cash is king, and every dollar of debt is a direct drain on your cash flow. But, it’s never too late (nor too early) to take counter measures that will help you get back on track.

Should I try to pay off my mortgage before retirement?

The days of mortgage-burning parties are nearly a thing of the past. As a result of the home refinancing hey days of the last five to ten years, 67% of homeowners in their 50s and 60s are now carrying mortgage debt well past the age of 70. *

Financial planners are divided on whether it’s a good idea to try to pay down your mortgage as soon as possible. There are those who say that it may be a disadvantage to lose the mortgage interest deduction. The reality is, however, that many retirees don’t have enough personal deductions to be able to use their mortgage deduction with most only qualifying for the standard deduction. Also, if you enter retirement with 10 or 20 years paid on your mortgage, the interest portion has declined to the extent that it’s not generating enough of a deduction for many people.

The answer is, yes, you should try to pay down your mortgage by making extra principal payments when you can. The alternative, which is becoming more of preference for an increasing number of retirees, is to simply downsize and sell your home and apply the equity to a more affordable living space.

Do I save for retirement or pay down credit card debt?

Sadly, this is turning into a classic dilemma faced by a majority of Americans. Unquestionably, you should try to pay off all high interest debt before retirement. If your retirement assets are earning less than 6% a year, even 9% credit card debt will cost you vital cash flow. This is the time to get deadly serious about your credit card debt. Every penny you are paying towards debt needs to go towards your financial security, so you can’t begin implementing your debt payoff plan soon enough:

  • Get on a budget: Set a monthly target for debt payments (and make it a stretch goal) and then budget everything else around that. Eliminate non-essential expenditures. Find ways to stretch your essential expenditures. Downsize your lifestyle now. Your goal should be to pay off your debt completely within a year. Oh, and STOP USING YOUR CREDIT CARD!
  • Pay off smaller balances first: It’s easier and more motivating to check off the smaller targets first. It will help you build momentum as you tackle the bigger ones.
  • De-clutter: It’s probably time to get rid of a lot of stuff anyway. You can raise more money than you think by getting rid of clothes, appliances, old cell phones, CDs, furniture and half the stuff in your garage by putting it all up for sale on E Bay.
  • Save any excess cash flow: If you find ways to generate additional income it should be applied to savings. As soon as you reach your debt pay off goal, apply the budgeted debt payment to savings and don’t look back.

Should I just continue working or should I try to earn an income in retirement?

Recent retirees and Boomer pre-retirees have actually begun to forge a new normal for retirement by preparing for a new career well before their retirement date. Some have created a 'transitional' relationship with their employer, scaling back hours or changing their status to 'consultant.' Such arrangements can sometimes extend the working relationship with an employer. Some are branching out to start a business of their own or monetizing a hobby. Many boomers are already planning their new careers by hitting the books and learning new skills.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do. By taking control of their new working life, they are more likely to be able to find an enjoyable balance of work and lifestyle that will sustain them financially, mentally, and psychologically.

*Retirement time bomb: Mortgage debt. Securian research reveals growing burden for boomers and retirees – April 2013

Tags: reduce debt, debt, retirement

How to Choose the Right Investment Advisor

How to Choose the Right Investment Advisor

Nov 2020

With the proliferation of investment and personal finance websites, investors have access to a boundless number of resources and tools once only available to financial professionals. And, while an increasing number of investors consider themselves to be at least somewhat selfdirected in their investment decisions, the ever-expanding world of investments and the increasing complexity of the financial markets require much more than a part-time approach to planning. With so much at stake, it would be important to seek the guidance of a qualified and trusted investment advisor, if for no other reason than to validate their own plans and decisions. Choosing the right investment advisor can, therefore, be one of the more critical decisions a physician makes.

When looking for any professional advisor, it is important to be able to match their characteristics, temperament, client profile and experience level to your own profile. In the case of an investment advisor, the more you know about your financial situation, your investment objectives and preferences, and your tolerance for risk, the more thoroughly you will be able to evaluate an investment advisor to determine if they are a match. Before meeting with an investment advisor, conduct a thorough assessment of your current situation and establish clearly defined goals and objectives.

Who Does the Advisor Work For?

Advisor or Salesperson: With hundreds of thousands of individuals calling themselves 'financial advisor' or 'wealth manager' or 'investment specialist', the challenge for investors is to wade through the marketing and advertising to be able to identify those financial professionals who truly put their client’s interests first. The financial services arena is vast and very fragmented among a number of different types of advisory models. Many advisor-types work for a financial institution, such as a bank, a stockbrokerage firm or an independent broker-dealer and are paid by their company to sell certain products and service. Other advisors have no allegiance to a company and are paid directly by their clients. Investors need to be able to determine which type of advisor is most likely to provide conflict-free investment advice.

Should You Pay Commissions of Fees?

Advisors who work for an investment firm or a bank may earn their income primarily through commissions paid by their company that generates its revenue from the sale of products and services. The more products an advisor sells, the more income he or she earns, and the more revenue the company generates. While these advisors must adhere to certain standards of 'suitability' when recommending investment products, they are not always required to place their client’s interests first as the “fiduciary standard” requires. Although most of these advisors have the best intentions of doing what’s right for their clients, they may come under pressure from their firms to produce a certain amount of revenue. This can be conflicting for advisors and drive them to recommend products that they otherwise wouldn’t in particular situations.

At the other end of the spectrum are advisors whose sole source of income are fees paid to them directly by their clients. In this way, advisors are not beholden to a particular firm or any particular investment products. They can search through an array of financial products to find the ones that are most appropriate for their clients. Because they don’t receive any commissions or fees from product sales, they can be completely objective in their advice.

Professional Guidance or Sales Process

Both commission-based advisors and fee-only advisors work with their clients through some sort of investment planning. Investors should never consider a recommendation unless their advisor has worked through the process of thoroughly understanding their financial situation, specific objectives, and conducting a thorough risk assessment. Investors need to be able to discern whether the analysis performed by their advisor is truly a financial map for achieving their objectives or simply a justification for a product recommendation. One key test would be to ask your advisor after a product has been recommended whether there is an equivalent investment product available that has fewer expenses or smaller fees. If they say no or hesitate, you may be in front of a product salesperson.

Background and Experience

It is important to treat the selection of an investment advisor much like the hiring of an employee. The right kind of advisor does work for you. Because your financial future is at stake, you need to ensure your advisor possesses a solid background and substantial experience for working with people in your specific situation. Their background should be completely void of any disciplinary actions by the regulators (check the FINRA broker-check website), and it should include progressive educational and industry accomplishments to demonstrate their commitment to their profession. Look for professional designations such as CFP®, ChFC, MFS, CFA as indications of their commitment to knowledge and ethical practices.

Advisors who have not experienced at least one complete investment or financial market cycle (generally, about five years) may not be seasoned enough. The more experience the better as long as it has been gathered working with people in situations similar to yours.


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