Risk takes many forms in the complex financial world wel live in. I define “risk” as “unexpected” (usually “unwanted”) outcomes. Unwanted outcomes can occur if:
1. You take no action when you should have taken some action (e.g. ignore insurance risk)
2. You take insufficient action (e.g. ignore your investments)
3. You over-react (e.g. liquidate your investments when the going gets tough, sit on cash and miss the next market rebound).
Financial risk can’t be avoided completely but it’s wise to know what you CAN control (examples below) and what you CAN’T (e.g. markets, world events).
Here are examples of Risk when you take no action:
1. You have old or no estate document – you die suddenly and all hell breaks loose since the State of NJ will decide how your assets are distributed and you will be the guardian of your minor children.
2. Your old IRA accounts list your ex-spouse as primary beneficiary because you never removed his or her name. You die and your ex-spouse inherits these investments.
3. You ignore tax efficiencies (and tax inefficiencies) when you buy or sell investments or make other decisions with tax consequences.
4. You believe the US government will “be there” if you need nursing home care --you decide long-term care insurance is “too expensive” since “you might not need it.” You’re not aware Medicare offers limited coverage if you’re discharged from a hospital. You’re foggy about Medicaid rules (which require you spend down virtually all your assets) and think your spouse can take care of you if you need help.
5. Most of your net worth is tied to your business but it hasn’t been properly valued and you have no exit strategy…or most of your net worth is tied to your employer stock.
6. You don’t know if you have enough life insurance to protect your family. You don’t know if you have enough long-term disability insurance or not.
Here are examples of Risks you incur with family when you stick your head in the sand:
7. You want your child/children to go to XYZ University, even if you can’t really afford it. You ignore the old adage “you can borrow for college but not for retirement.” You want the best for your child/children and hope retirement somehow will take care of itself. However, you’d just spent your nest egg on college and don’t know if you have enough for retirement.
8. You don’t feel you’ll live past average life expectancy. You’ve worked hard – why not enjoy life by buying and doing things that give you pleasure? Things will take care of themselves…somehow.
9. You have ideas or dreams about retirement but you don’t discuss these with your spouse because it doesn’t occur to you, or you want to avoid an argument.
10. Your aging parent(s) have the potential to suck you into a financial hole but you avoid having an open, non-confrontational discussion (possibly with a professional present) to address these issues.
Here are examples of Risk caused by insufficient or excessive reactions to portfolio and market events:
11. You’re convinced the sky is falling (again --as it did in 2008 and other times). You liquidate your holdings to cash. Perhaps you use some of this to buy silver or gold because “it’s solid, will retain value and is an inflation hedge.” It’s time to retire - how will you extract income from silver or gold coins?
12. You act on investment advice from your neighbor, brother-in-law or an advisor who isn’t credentialed or sells products – you’re told the smart thing to do is invest 100% of your assets in commodities – or energy – or in annuities.
13. You ignore your investments – you have no clear idea how they’re doing because you shove your statements into a drawer or don’t open them at all.
Do any of these 13 examples of Financial Risk sound uncomfortably familiar? If so, make smart choices with your money and invest in objective, qualified advice from professionals who don’t mix advice-giving with product sales: Fee-Only financial advisors, estate and elder care attorneys, therapists (for family issues), accounts and business valuation experts.