John Bullis: Protecting investments from risk
April 24, 2012
Almost everything we do has some risk involved. I spoke to a group recently and tried to explain how I see insurance. I buy insurance to shift some of the risk to the insurance company. If I have a low deductible (the part I pay), I shift more of the risk to the insurance company.
On the other hand, if I drive an old vehicle that isn’t worth a lot, maybe it is best to have a high deductible and a low insurance premium. Insurance agents will give you a lot of choices and advice if you ask them to do so.
For financial investments, the amount of risk I am willing to assume is of major importance. Most stockbrokers start with trying to find out my risk tolerance – how much risk I can assume and still sleep at night.
Some folks have most of their money in low-earning savings, money market or similar interest earning investments. That is low risk, but also low returns.
Their returns may increase a bit in the future when interest rates go up with the inflation our federal government is causing. We will see.
In the meantime, some have chosen to invest in good, big, quality stocks that pay dividends. Some stocks are paying 3 percent or more each year in dividends. The hope is the price of the stock will increase with the future inflation as well.
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Any stockbroker can give you a list of blue-chip stocks that pay good dividends. However, there still is some risk the stock or the company will not do so well in the future. Think of Kodak, for example, where the technology changed so much, etc.
Most investment advisers will suggest an asset allocation that seems to be in tune with your risk tolerance and your goals and circumstances. An allocation that has some interest-earning investments (low risk, low return) and some good stocks (higher risk, higher long-term returns) seems best.
Some folks will buy annuities for the lifetime income. That’s fine if the company will always be around to pay as promised. Most annuities have a penalty – a cost to you – if you cash out early. That still can be a good investment if it meets your personal goals and desires. It is important to buy from solid, established insurance companies that have earned high ratings.
But annuities and interest-earning investments still have risks. One risk is that inflation will reduce the purchasing power in the future. For example, if we have just 5 percent inflation for the next 10 years, the purchasing power of the dollar is reduced to about 61.4 cents. If we have 3 percent inflation for the next 10 years, the purchasing power of the dollar is reduced to about 74.4 cents.
Did you hear, “The easiest way to get sleep is to count your blessings instead of your problems.”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.