INDUSTRY INSIGHT
YOUR FINANCES
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RISK IS A FOUR-LETTER WORD
“
It is not the return on my investment that I am concerned about ; it ’ s the return of my investment .” - Will Rogers
No matter how you invest your money , you are always taking on risk . Many consider risk to be a four-letter word . The type of risk Will Rogers referred to in his above quote is Market risk .
Market risk can be defined as the loss on the investment amount , or the Default risk ; i . e ., the money invested is never returned to the investor . Not good .
There are many kinds of risks , including Liquidity risk , Concentration risk , Credit risk , Reinvestment risk , Longevity risk , Inflation risk , Horizon risk , and others . Right now , investors are mostly concerned with Market risk and Inflation or Interest Rate risk .
The question is how to mitigate these two risk factors . Here are several effective ways for your consideration :
Diversification . I know you ’ ve heard this before , but you do not want to have all your eggs in one basket . You should own various types of assets , including stocks , bonds , real estate , etc . Further , you should own large cap , mid cap , and small cap stocks in the US and also globally .
With bonds you should have short , intermediate , and longterm maturities , although there is little incentive to buy longterm bonds right now since the 2-year Treasury bond yield at 4.148 % is greater than the 10-year Treasury bond yield at 3.693 % ( as of 9 / 22 / 2022 ). This is what we call an inverted yield curve . There is an inverse relationship between yield and the price of bonds .
As interest rates and yields go up , the price of bonds typically goes down . Since the interest rates and yields appear to be increasing right now , bond prices are lower . Some might consider this a buying opportunity .
Pay particular attention to how a bond is rated . Purchasing lower rated bonds may provide a higher return , but they may also have a greater risk of default .
A New Dynamic . In a diversified portfolio , you want noncorrelated assets . In other words , the assets in your portfolio should respond differently as market factors change . For example , stock and bond prices should be non-correlated reacting differently to what ’ s going on in the market . In the past , when stocks are down in value , bond values have often remained stable or gone up .
Recently , this has not been the case . The risk calculus has changed . “ Bond yields are trading at their highest levels in more than a decade , posing yet another threat to a stock market that has struggled to find its footing this year ,” according to a recent Wall Street Journal article .
The article goes on to say , “ Fewer than 20 % of stocks have dividend yields greater than the yield of the 10-year Treasury
note .” Based on this dynamic , many investors may choose to purchase lower risk bonds for income rather than face the greater volatility associated with stocks .
Dollar Cost Averaging . Most 401 ( k ) participants continue to invest on a regular basis regardless of what the market is doing . Sometimes they are buying when the market is at a high point , as it was last year . During this bear market , they are buying at a low point .
There are no guarantees but investing at regular intervals in all kinds of markets often tends to result in a lower average cost . It ’ s not always easy to continue investing when the market is volatile , but it could possibly pay off overtime .
Long-Term Investing . The stock market has shown resiliency over many years . In most cases , the long-term investor wins . The stock market is up 70 % of the time . Those are pretty good odds . Big casinos have been built on lesser odds . A long term , goalsbased approach to investing has a better than average chance for success .
Financial Advisor . Working with a CFP and accredited Fiduciary may also increase your chances for a successful financial future . Investors tend to gain confidence during a stock market rally or Bull market , causing them to become overly optimistic and buy high . During a Bear market or market selloff , many investors have self-doubt . This can lead to selling out of fear and at a loss .
A good Financial Advisor will have your back and hopefully prevent you from making any big mistakes . Professional athletes are the best at their sport , but they all have coaches and trainers . If you are looking for an Advisor and Fiduciary you can trust , consider calling our office for a free introductory meeting . A second opinion never hurts .
Material discussed is meant for general / informational purposes only and it is not to be construed as tax , legal , or investment advice . Although the information has been gathered from sources believed to be reliable , please note that individual situations can vary therefore , the information should be relied upon when coordinated with individual professional advice . Past performance is no guarantee of future results . Diversification does not ensure against loss . The opinions and forecasts expressed are those of the author , and may not actually come to pass . This information is subject to change at any time , based on market and other conditions .
This Industry Insight was written by Garrett S . Hoge .
Garrett S . Hoge , CFP ®, ChFC ®, MS , of H Financial Management , is a private wealth manager based in Southpointe serving the ever-changing financial needs of his clients . Please contact Garrett at H Financial Management , 400 Southpointe Blvd ., # 420 , Canonsburg , PA 15317 , Phone : 724.745.9406 , Email : garrett @ hfinancial . net , or via the Web : hfinancialmanagement . com .
Securities offered through Triad Advisors , LLC , Member FINRA / SIPC • Advisory Services offered through H Financial Management .
H Financial Management is not affiliated with Triad Advisors , LLC .
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