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Risk a key consideration in a financial strategy

Updated: May 3, 2013 12:14PM

Originally published: July 8, 2002

Should I get out of the market? It’s the desperate question posed by many people this week. Typically, I avoid answering that question by pointing out that every individual needs a different strategy, depending on age, time horizon, financial status and risk tolerance. What’s right for one person might be completely wrong for another.

But this time I realized that the question demands an answer: In or out?

The answer is: Neither.

It’s the wrong question. Except for a very few people at the ends of the risk spectrum, the stock market is not an “all or nothing” proposition.

All or none

Risk is a continuum--shadings and degrees of opportunity to make, or lose, money. Recognizing degrees of risk is an essential element in creating a financial strategy. Life involves risk. The secret to successful financial planning is to act when the balance of risk and reward is favorable.

Some people should avoid risk entirely. Senior citizens who are just hoping to barely make their money last as long as their lives have no business investing in the stock market at all. If they lose, they have no way to replace those dollars they saved for retirement. It’s “chicken money”--and this column has warned them about risk for many years.

At the other extreme, you can’t keep some people from taking excess risk, any more than you can keep people from wagering at casinos where the odds are formidably against them, or from buying lottery tickets. But at least you hope they do it with only a small portion of their capital. To risk everything is either a sickness--or complete ignorance.

For most of us, though, the question of investment risk is not all or none. It’s a question of degree.

Degrees of risk

Most people are forced to make investment decisions these days, since the old, guaranteed-check-a-month pension is typically a thing of the past. Now, you must save and invest for your own retirement, using IRAs or 401(k) or 403(b) plans. So you’ve been forced to make decisions about risk, without the background or education to make appropriate choices for your situation.

The graphic in this column describes the opportunities typically available to most 401(k) plan investors. (I left out company stock, but that would be near the top of the risk spectrum, because no matter how good the company, excess concentration brings an extra degree of risk.) You’ll need a mixture of risk, depending on your circumstances; you don’t want the all-or-none, in-or-out extremes of panic investing.

Younger people probably want to have most of their money somewhere in the middle--an index fund to just match the performance of major stock market indices like the S&P 500. But they may choose to take a small portion and invest aggressively in specialized funds, or beaten-down areas. That can be offset by a portion in balanced, or equity-income, funds, which also buy bonds or dividend-paying stocks.

As you move toward retirement, you’ll want to move on the risk spectrum--choosing more conservative funds, and even safer money market investments for a portion of your assets. But remember, even if you retire at age 65, there’s a good chance you’ll live another 25 years. So you’ll always want some exposure to stocks, unless you’re living in very tight circumstances.

In a way, your job as your own money manager is much more difficult than that of the highly paid pension fund managers who earn a living making these decisions for others. They can be more emotionally detached, because it isn’t their money! Plus, they’ve had training that gives them the perspective to invest for the long run.

OK, now you’ve had training, too--in both a bull and a bear market. This isn’t the time to give up on investing. It’s the time to put that experience to use for the next time around. Because though it may take a while, there will be a next time. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to

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