bluecollardollar: on risk and investing

on the radio with Paul Petillo

books by Paul Petillo

I just published my fifth book - this time with Smashwords! ReBuilding Wealth in a Paycheck-to-Paycheck World by Paul Petillo, copyright 2011 This ebook is available across all platforms including iPad and iPhone, Amazon and Sony.

on personal finance

In the world of personal finance, asking what's the worst that could happen is not the same as asking: "will I be able to afford this?" or "have I saved enough for retirement?"
More personal finance

on retirement

If things are good, for some they won't be good enough. If it turns out that things are not so good, someone will ultimately benefit for this off-chance negativity.
More on retirement planning

on mortgages

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners.
More on mortgages and homes

on insurance

Is the insurance industry the next victim of the financial crisis?
Health Channel

on investing

The mutual fund investor has a great many more options available to them in the post-Great Recession marketplace. The question is: are they right for you as you make a retirement plan using 401(k)s or IRAs?
More on investing

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on counting on risk: five things

Because everyone is different, we approach the same thing from the perspective we bring to it. People who bring no perspective sans the apprehension of what loss might mean are not financially illiterate. In many instances, the slow to react and underinvested cohort is perhaps more literate when it comes to investing by simply allowing second thought to enter into the equation.

These investors know who they are. On the other side of the equation, we have the investor who doesn't necessarily know who they are, just who they want to be. The reflection in the mirror has been altered to suit the vision they have of themselves. The question is: can those who underinvest learn for those who do? And can the invested learn form those who more realistic in their approach?

To this I offer five ways to come to grips with your inner investor.

• One Elroy Dimson, expert on long-term stock returns, London Business School, and co-author, "Triumph of the Optimists" suggested: "Risk means more things can happen than will happen." Not a single one of us believes that the moment we walk out the front door nothing will happen. Risk, in its simplest form suggest that anything can and will happen. To be an investor you will need to embrace possibilities, adjust what happens to you when it does by preparing as much as is possible in advance because you know it could.

• Two Every investment has risk. None of the expert guests I have had on my radio show Financial Impact Factor has ever disputed this. In fact, although many have advocated for low cost investments such as index funds and ETFs (exchange traded funds), they have been unable to say that these are safe investments. They come with risks even as they suggest they are not as risky. What these types of investments do is lower the cost of that risk - which is a good thing.

• Three Not doing anything with your money has risks as well. The old thinking of simply holding on to your money, the under-the-mattress approach actually has risks. You risk that your dollar with be worth less (inflation) once you finally do decide to spend it. That's not to suggest that a robust savings (an emergency account)isn't prudent. It is. Not having money put away for emergencies can prove even more risky. But not putting a certain amount away (after this account is built) adds to the risk you won't have enough for retirement - a time when the money you have when you aren't working any longer will not outlast your life.

• Four This leaves you with the nagging thought of having not done enough. There are some simple ways to beat this. Use your retirement plan at work. If you don't have one, start your own with an Individual Retirement Account or IRA. Once that decision is made, once you know that you have to do something, look for index funds. Not just one but a basket of them.

  Every investment carries risk. Index funds carry risk. ETFs have risk. But the risk that your investments will lose what you have invested is far outweighed but the chance that time will be on your side and that you steadily contribute. This "basket" should cover four to six investment opportunities: large cap stocks (the S&P 500, a dividend heavy investment that carries additional rewards), mid-caps and small caps (which offer some more aggressive opportunities), international and emerging markets (a broad out-of-the-country investment for a global time) and lastly a bond index fund (a fixed income investment that protects with less risk). You add to your portfolio from there and learn from the experience.

• Five Yes low cost will trump high cost in the long-run. This is why index funds are the most financially savvy way for the low-risk investor to embrace their inner investor. You will know that the cost of investing is at its least expensive and that means more money in the game.

While there are a whole host of investment-centric risks that will then come into play (often referred to as biases, genetically hard-wired responses to what your cohorts are doing such as herd mentality or loss aversion), they will be something you can and should confront. But there will be time for that.

Once in the mindset, the key is staying in and contributing more than you think you can afford. The optimal percentage of your pre-tax income contribution to your 401(k) should be north of 10% - well north for the best outcomes. But it will take baby steps. First footfall should be the realization that you need to do something. The second step will be doing it consistently. The last step, and by this time you'll be walking at full stride, is to keep investing over time.

One last thought offered by Laurence B. Siegel, research director, Research Foundation of the CFA Institute: "Other people are smarter than you think they are. Index."

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