Ouch! Obviously there is an extreme price to be paid for having “safe” investments, and you ignore inflation risk at your own peril.
Now there are other risks to owning stocks that must be understood and managed. Investing in individual companies carries the business risk that even the “best” companies may fail, and stockholders may lose everything. But that risk is easily managed by diversification, and that is why I personally own a (very small) piece of more than 12,000 companies, so if one falls on hard times, it is of little consequence to me.
Finally there is the market risk that the stock prices of all companies fall, and the current market value of even a diversified portfolio goes into the tank. In fact, since 1980, the averageintra-year decline in the S & P 500 index, for example, has been 14%, and over the course of a full year we have seen declines approaching 50%. That’s called price volatility, and it is real.
But volatility equals risk only if you have to sell! Stock prices have fallen many times in the past, but the key fact that many miss is that while prices go down, they have never stayed down. So if you don’t have to sell when the market is down; if you can be patient and wait until the prices recover, you will have lost nothing due to market risk.
That is why the financial planning process is so important. If you know what your needs are in the relatively short term, you can accept some inflation risk (by putting that money into CDs or Money Market accounts), but not take major business or market risk. Then that money (while perhaps making only a modest return) will be there when it is needed.
But if you don’t need the money for some time (five years or more), you don’t really need to be concerned about the volatility of your investments, because you can wait to sell until the market recovers. As Warren Buffet is so famous for saying: “The stock market is very efficient in taking money from the impatient investor and giving it to the patient investor.” That patient investor should be you!
Emerson Hartzler, MBA, is a Lakeview Village resident, and, though he lives in a retirement community, he continues working as a financial advisor for Triune Financial Partners, LLC, at Lighton Plaza, 7300 College Blvd., in Overland Park, Kan. Reach Triune at 913-825-6100.
Learn more about Lakeview Village–the senior neighborhood of choice, and the largest retirement community in Kansas–by visiting our website at lakeviewvillage.org, or checking us out on Facebook.