To be successful at anything, one must be able to evaluate the risks that one will encounter. As the New York Jets entered the draft and explored off-season free agent additions this year, they are aware of the risk that they have with an unsigned and aging starting quarterback (QB).
This Jet fan was glad that the coaches have accounted for this risk and drafted accordingly with the second round pick selection of QB Christian Hackenberg from Penn State. Once they understood the risk that they are exposed to, they will be able to address this vulnerability in a satisfactory way (or at least this long-term Jet fan hopes so).
In a similar manner in order for an investor to be successful, one must understand and plan for these three major financial risks.
Investment risk – this requires you to choose the right portfolio allocation for your situation with a special emphasis on understanding one of the great enemies of wealth – volatility. All investors understand that stocks are subject to short term declines but successful investors understand with a diversified portfolio these declines are will be temporary in nature.
Behavior risk – The major reason most investors fail. This can be viewed as the cost of letting emotions guide investing. The selling into a bear market and buying into a euphoric market that is all too common for investors results in portfolio under-performance. According to a recent study by DALBAR, this behavioral gap has resulted in underperformance of 5% to 6% per year for the average stock investor.
DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames. The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.
This risk can be handled if investors chose to work with an advisor to help modify one’s behavior so that they can close the gap between what investors receive and what their own investments return.
Please note as with all investments, the fact that the buy-and-hold strategy has been a successful strategy in the past does not guarantee that it will continue to be successful in the future.
Longevity risk – The risk that you will probably live longer than you think. With the continued advancements of the medical profession, Americans continue to live longer and longer lives. While this achievement brings many benefits, it also requires that you plan for a long retirement and the need to combat the ever rising cost of living.
Once one understands the major financial risks that need to be accounted for, it becomes much easier to put a plan in place to address them. In fact, one can say it’s much easier to plan for these major risks than trying to figure out if the the 6 foot 4 inch quarterback from Penn State will succeed in the NFL which this long term Jet fan is rooting for.
If you enjoyed this article, CLICK HERE to subscribe to free updates from “Roots of Wealth”.