How Can My Portfolio Completely Avoid Risk?

With Moody’s Investment Service downgrading more than a dozen global banks to reflect declining profitability, the Euro Zone looking to be in grave financial crisis, and the U.S. Economy having a gloomy shadow in the distance, many investors are asking how to find investments that carry no risk.    Some of these investors are folks that are retired and looking for current income while others are at the 20 yard line approaching the end zone of their retirement day.    So where do you find an investment that carries no risk?

Unfortunately, every single type of investment carries some inherent risk.    Learning how to balance out that risk or being timely with your investments on knowing what risks to take at what time can ultimately determine success or failure in your overall investment plan.   When it comes to today’s main risks facing investors, here are the three big I’s with respect to investing and risk.

  • Inflation Risk– Inflation risk, sometimes known as purchasing power risk is the chance that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to rising inflation.  Since the United States Federal Reserve added tremendous liquidity to the US Commercial Banking system the past four years, many people worry that the quick rise in money supply will inevitably affect a rise in inflation.    So, with all of the fears going on around the world, one would think that potentially leaving money in the bank would be risk-free.   If your bank account is earning 1% guaranteed and FDIC insured you will see your account statement go up.   However, you need to consider that if inflation is 4% or 5%, you are safely losing the purchasing power of your money.   This is a good example on how a risk-free investment could actually carry risk.
  • Interest Rate Risk– Interest rate risk is essentially the risk that a bonds (security) value will change due to a change in interest rates.  Interest rates and bonds generally have a see saw or inverse type relationships.    That means a bonds value can actually go down when interest rates rise and a bonds value can actually go up when interest rates go down.    The longer the maturity of the bond, the more of a swing the bonds value can have when interest rates spike or decline.   Think about it like if there were two kids on a see saw that weighed exactly the same amount.   All of a sudden one of the kids was replaced with a much heavier kid causing the see saw to be out of balance.   This is the image of what it looks like when there is an interest rate change.   While a bond may be making a consistent interest/coupon payment to you every six months or every quarter, you should keep an eye on the length of maturity of your bonds in case interest rates spike up again as your bond could lose significant value especially if you don’t plan to hold to maturity.  If you own a bond mutual fund or bond exchange traded fund, you may want to understand what the bond funds maturity is or as more commonly known the average maturity of the bond portfolio.    Although bonds can seem safe, interest rate risk could greatly affect them.
  • Investment Risk– This can mean different things to different people, but I generally think about this risk with equity investments like stocks.  Typically you are looking at things like business risk, valuation risk, and force of sale risk.    The risk that most people are familiar with is company or business risk.  We’ve all seen a business/franchise/company that we thought was really fantastic when it first hit the market.   Our enthusiasm got us to invest dollars into that company or business, but the business model couldn’t sustain itself financially.  Or perhaps a new and more competitive product came out that dusted the product of the company you invested in at that time.   It’s best to diversify your assets within this investment category, but far too often investors basically buy the same investment just at different places.   It’s like the bank investor who thinks buying 5 CD’s at 5 different banks is a strategy for diversification.

Every investor would like the ideal situation of high growth without any risk.   No matter what path you go down, you will inevitably face some type of risk within your portfolio.   Having a quality financial plan to determine the overall rate of return your money needs on an after-tax basis to achieve your goals is a great starting point.  Figuring out after how much money you need to save to reach your goals will be an important second piece of information.  Between these two factors, you can determine what kinds of risk you want to take between your current capital base and future savings.   Although there is nowhere to hide your portfolio completely from risk there is certainly a difference between riding the kiddie coaster and lightning loops (this was the first upside roller coaster I ever rode at Six Flags growing up in New Jersey).   Make you balance your ride so you can complete it without falling out of your seat!

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20’s, 30’s, and 40’s in the country.

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS. NFPAS does not provide tax or legal advice.   This site is published for residents of the United States only. Registered Representatives and Investment Advisor Representatives of NFP Advisor Services, LLC (NFPAS) may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact NFPAS Compliance Department at 512-697-6000.   PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Advisor Services, LLC makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Advisor Services, LLC liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

Hey!

My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

My mother is still the only one that calls me by my real name Theodore Michael, my wife calls me Teddy, but for the rest of you it is just plain old Ted.

Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

Read More About Ted Here

Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

Background and qualification information is available at FINRA's BrokerCheck website.

No Comments

Leave a Comment