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The Risk of Not Taking Risk

Goat tightropeWhen it comes to the long term success of your investments, not taking enough risk might be the biggest risk of all.

As financial advisors, it is our fiduciary duty to ensure that the investment plans we create are aligned with the goals of our clients. Sometimes, this means asking our risk-averse clients to step outside of their comfort zone in order to achieve their goals.

Understanding Risk

Many self-declared risk-averse investors believe that putting their money into stocks is too risky. However, not investing some of your portfolio in stocks is pretty risky too. The rate of return on bonds and other low-risk investments may not financially prepare people for their retirement because the growth of their portfolio may not outpace inflation. Then what happens? Investors trade the actual security of their retirement for the perceived security of investing in lower-risk options.

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It's Never too Late to Make a Change for the Better

Active BikingChanging Spending Habits in Order to Retire

In this Quarter’s ClientFile we are sharing the story of Allen and Lisa. A couple who had boundless love for one another, but when it came to communicating about their finances, the silence was deafening. They were on completely different pages financially speaking. Lisa had no idea how much was being spent and on what. Allen, though well intentioned, had brought their spending to a point where, if they didn’t receive bonuses, then they wouldn’t have enough money to pay their taxes.

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Defining Success

Summit ClimberAs we enter a new year, we often reflect on the successes of the prior year (as well as not so successful moments) and we look to improve in the coming year. Resolutions about our habits (good and bad) are often made. No matter what type of changes, if any, you have chosen to make this year, they usually come down to two things, happiness and success.

If we look at society and societal norms, a lot of weight is given to success when it comes to defining happiness. If we see a person who is successful, it is often assumed that they are happy. In reality, we actually have no idea whether or not that person is either happy or successful; for a couple of reasons: First of all, we can only measure someone else’s success or happiness by what we know about them. Secondly, and more importantly, we can only measure someone else’s success or happiness by how we define success and happiness. There is really no way of knowing whether their measures are even similar to our own.

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New Market Highs and Positive Expected Returns

There has been much discussion in the news recently about new nominal highs in stock indices like the Dow Jones Industrial Average and the S&P 500.

When markets hit new highs, is that an indication that it’s time for investors to cash out? History tells us that a market index being at an all-time high generally does not provide actionable information for investors. For evidence, we can look at the S&P 500 Index for the better part of the last century. Exhibit 1 shows that from 1926 through the end of 2016, the proportion of annual returns that have been positive after a new monthly high is similar to the proportion of annual returns that have been positive after any index level. In fact, over this time period almost a third of the monthly observations were new closing highs for the index. Looking at this data, it is clear that new index highs have historically not been useful predictors of future returns.

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In the Bond Market, Good Things Come to Those Who Wait

Hand on Chin Waiting CopyA few weeks ago the Federal Reserve met and decided to raise short-term interest rates by 25 basis points (a basis point is equal to 0.01%). Looking ahead to 2017, the bond market has already priced in additional interest rate increases. If the economy continues to improve additional rate increases will likely occur. The price on bonds already issued will decline. While higher interest rates have a negative impact on bond prices in the short-term, higher interest rates also means more income will be paid from new bonds being issued. This means higher total returns for bond investors.

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