By Dennis Kagel, Chartered Financial Consultant
If you are facing a health problem and you have a choice of multiple treatments all designed to produce favorable results, would you choose the one that involved the most or least amount of risk (unfavorable results, lingering negative side effects, etc.)? Obviously, almost everyone would opt for the least amount of risk with all things being equal.
I’m always amazed that the vast majority of people seem to lose all common sense when it comes to applying the same type of thinking to their investments, especially retirement planning. People have heard me state many times that the number one mistake people make with their money is they stay too heavily involved in risk as they approach retirement. The number two mistake trails by such a wide margin that it isn’t even worth mentioning! Let me restate one of my favorite sayings that every client and financial advisor should adhere to: investors should always take the least amount of risk to reach their investment goals.
How do you know how much risk you should be taking? How do you know how much risk you are currently taking? What are the best options available today for that portion of your portfolio that you want to be more secure and protected from risk? How often do you need to reevaluate how your assets are allocated between risk investments and investments that are more secure? These are all important questions that each individual needs to address in order to feel in control and confident that they have a sound plan that is designed to accomplish their retirement goals.
The Rule of 100 is simple, yet it is a good starting point to answer how much risk you should be taking. Take your age and subtract it from 100 and that answer is the maximum percentage of your investable assets that you should have in risk investments (stocks, bonds and mutual funds, etc.). For example, if you are 65, you should have no more than 35 percent in risk investments. Of course, that would mean you would have 65 percent of your investable assets in more conservative and secure positions. Admittedly, there are various degrees of risk, but the point is, all the aforementioned do involve some degree of risk. Most advisors promote bonds for safety and income, but with bonds, there are interest rate risks, and the question of credit worthiness of the issuing authority needs to be considered (for example, lots of investors owned Lehman Bros. and Enron bonds that today are worthless).
To determine how much you have currently at risk, simply list your stocks, bonds, mutual funds, variable annuities, REIT’s, precious metals, and any investment that varies in value due to market and interest rate changes, in one column. As our regular readers know, this is your red money. Next, list your checking accounts, savings accounts, credit union, CD’s, fixed and index annuities, and the cash value of your life insurance (whole life and indexed life, as variable life goes in the red money column). Actually, our model would divide these accounts and plans into two separate categories. Yellow money represents what you will use over the next six months to two years (bank and credit union accounts). Green money possesses three very distinct characteristics, as follow: 1) principal is guaranteed & protected from stock market losses, 2) it allows you to “retain your gains” (you won’t lose previous year’s gains due to stock market losses), and 3) it will guarantee your income during retirement.
A big part of the challenge for today’s conservative investor is that there aren’t many options that satisfy all the characteristics of green money. We specialize in what, in our opinion, are the best green money options available today. We believe strongly in the idea that one of, if not the biggest, single factor for retirement success is having the right balance between green money and red money.
For a no-obligation second opinion of your portfolio, please give our office a call today at (309) 454-9171 to schedule a convenient time to visit. We promise to provide you with the following items that are essential in order for you to maximize your future financial success: An analysis that will tell you how much risk you are currently taking, a fee analysis so that you’ll know how much in fees you’re currently paying, and an income analysis to assess if you are on track for sufficient retirement income.