Thinking About All Our Risks

Thinking About All of our RisksThe financial markets seem to be taking a breather after last week’s roller-coaster rides. We’re all digesting the latest news of short-selling restrictions and a $700 Billion stabilization plan for mortgage-related debt. But now is also a good time to step back and think more broadly.

Ron Lieber, who writes the New York Times “Your Money” column, was a busy man last week, writing columns and recording video clips to help readers understand what was going on.  In Saturday’s edition, he wrote a nice article on “Minimizing Your Own Exposure to Risks.” He noted that now is a good time to reflect on the risks we take not only in our investments, but in other areas of our lives: insurance, job stability, and mortgages.

Ron was kind enough to quote me following an e-mail exchange that we had late last week.  I observed that people tend to understimate the risk that they will outlive their money.  We also talked about the fact that whereas many people’s parents had pensions to supplement their income in retirement, most Americans working today will rely heavily on their own investments for income when they retire.

When the stock market plunges, our brains tend to focus on the short-term pain that we feel when we check our retirement account balances.  The urge to stop the pain by selling all our stocks and stock mutual funds is hard to resist.  What we tend not to consider is that if all of our investments are in cash, there better be an awful lot of it, because it won’t grow faster than inflation.  Taking some risk with our investments is essential if we want to have assets that grow long-term.  Of course, this assumes that your overall portfolio is diversified.

The article also notes that “diversifying” your work income is a wise strategy.  The economy may already be slowing, but if you have a regular job and a side interest that brings in income, you have a bit more protection against a future layoff.

Mortgages rates are a risk that can be controlled if you have a fixed-rate mortgage.  If you don’t have a one right now, you should consider refinancing.  Interest rates are near historic lows, and chances are good that they will go up in the next few years.

The near-collapse of AIG made a lot a people realize that the staid realm of insurance policies bears its own risks.  Rarely, but once in a while, insurers fail.  Having all your insurance protection from one provider is probably OK if your policies have benefits of less than $300,000, but if you need a lot of insurance, it can be wise to spread the coverage around.

Another helpful observation: there are common-sense things you can do to reduce risk.  Not having an accident is even better than having one and being insured.  Lieber quotes Kevin Albaugh, an engineering consultant living near Buffalo, who never goes out during driving the first snowfall of the winter.  He reasons that drivers who don’t know how to drive in snow are more likely to have their accidents that day, and thus he avoids getting hit by them.

To these observations I would add another: a common “risky” behavior that I’ve observed is that of investing heavily in industries that bear the same risks as one’s employer.  Obviously, you shouldn’t invest too much money in your employer’s stock – if the company has a bad quarter, you could lose net worth and your job.  But it also means that if you work in a high-tech business, you increase your level of risk if you also load up your portfolio with high-tech growth stocks.

The article does a nice job of helping people do for themselves what good financial advisers do: think about the “big picture” of their risks, instead of only focusing on what happened last week.

photo by: kyz

About the author

Thomas Fisher, CFP®

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