Types of Risk

Many investors view the stock market as risky, because they may lose money.  In our eyes, it is worthwhile to have some awareness of the various types of investment risk.  In our video, we share several sources of investment risk that you may not have fully considered.  Below, we talk in more detail about those risks.

First, let’s simply list a few of the investment risks, and we will dive deeper into a few of them to illustrate the point.  Here is a list of well-known risks:

•    Market Risk (also known as Systematic Risk)
•    Interest Rate Risk
•    Business Risk
•    Inflationary Risk
•    Liquidity Risk
•    Reinvestment Risk
•    Social/Political/Legislative Risk
•    Currency/Exchange Rate Risk
•    Call Risk and Credit Risk (specific to bonds)

Those are a lot of risks, but hopefully it is not overwhelming.  For example, in our last video we talked about diversification and asset allocation which, combined, can be used to mitigate (but not eliminate) several of the risks above, including Market Risk, Business Risk, Exchange Rate Risk, and even Social/Political/Legislative Risk.  

Today, I would like to point out Inflationary Risk, in particular.  An item costing $100 in 1985 would cost about $220 in 2015 due to inflation.  This is serious damage to your purchasing power and can make retirement a lot less enjoyable than you might want it to be.  In general, it is a good idea to have many of your investments at least keeping up with inflation.  Historically, stocks have done this while cash or near-cash investments have not.

Another current risk to be aware of is Interest Rate Risk.  Interest rates have been at historically low levels, and it is hard to imagine them doing anything other than going up.  As interest rates rise, the unfortunate result is that bonds go down in price.  We did not elaborate on the mechanism for this in the video, but we will do so here.  If a person owns a bond that is paying $50 per year on a $1,000 investment, that is a 5% return.  Now imagine that over a few years, the market interest rate has moved up to 10%, and the owner wishes to sell the bond.  Who will buy that bond at the full price of $1,000?  No one.  The new buyer wants to earn the current market rate.  Since the bond will continue to pay only $50, the way to achieve a current market rate is discount the price so that 10% is earned on the reduced price.  

The key takeaway from this is that there are many risks to consider.  Sometimes the risks are the ones that scream from the media headlines on a daily basis.  Just as often, risk can be silent but can significantly affect the value of your investments, nonetheless.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830  

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James.

How to deal with market volatility

The start to 2016 has been marked by uncertainty in a number of areas. China, ISIS, Oil, etc. Not surprisingly, this uncertainty has caused plenty of fear and, consequently, volatility in global stock markets. Also not surprising are the familiar echoes from the “talking heads” on television and even some investors to “Get out!” or do something. Of course, there is no one-size-fits-all approach to investing or risk management. Every family’s situation is unique and calls for an equally unique approach. Indeed, with the typically short-term nature of these downturns, some investors likely ought to be buying, not selling.

So what does a person do when markets are volatile? Well one of the worst things a person could do is react emotionally and make a rash decision. Pause and ask yourself two questions: 1.) What is your investing time frame? 2.) How is your portfolio invested? If you’re 10 or more years from retirement and your portfolios are invested aggressively, that’s probably ok. Short-term volatility should not change a long-term investment strategy.

What if you’re closer to retirement or already retired? If you’re within 10 years of retiring, you probably should be lowering the risk in your portfolio already. Meaning moving some of your aggressive investments (often stock), toward less aggressive investments (often bonds). If that’s you, depending on your tolerance for risk, that probably means you have 50% - 75% of your total investments in stock. Because most people still need their investments to grow in retirement, that same logic applies; although the total percentage of stock may be in the slightly lower 40% -65% range. At Macco Financial Group, this is one of our guiding principles. And we work very hard to position our clients' portfolios for volatility so as not to expose them to excessive risk.

Finally, we recently hosted a conference call with Nicholas Lacy, Raymond James Asset Management Services’ (AMS) Chief Portfolio Strategist. Nick is greatly respected in the industry and shared some tremendous insight on AMS’ views of global markets, volatility, growth expectations and what they have done and are doing to position portfolios for the future. If you’d like to hear a replay of that call, it is embedded below. We will be proactively contacting clients. And we invite you or anyone else concerned about the markets to call our office at 888-617-6830.

Respectfully,
Michael J. Macco
President, Macco Financial Group
Investment Management Consultant

"Any opinions are those of Michael Macco and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results."

How long could you live without the stock market?

Would you worry if the stock market closed for five months?  It did just that at the outbreak of World War I.  I’ll admit, that is over 100 years ago.  But what if the market was only open a few days a month?  I would guess that after a time, most people would actually worry less than they do now.  To see why that is so, let’s talk about what a market is, and what it does for us.

So, we hear about the stock market all the time.  Our media outlets seem to yell to us about the Dow Jones Industrial Average and the S&P 500 indexes on a daily basis.  However, those are indexes, not a market. 

The true definition of a market is a place where buyers and sellers meet to agree on the price and delivery terms for a transaction – the best known being the New York Stock Exchange, which traces its roots to 1792.  The NYSE trades in stocks, but there are other markets for stocks, bonds, options, commodities, and many other financial instruments throughout the world. 

Let’s also think about what a market is not.  It is not a determinant of value.  A market only reveals what buyers are willing to pay, and what sellers are willing to accept at one point in time.  The actual value of the items being negotiated can be far in excess or far less than the price that is agreed upon.

So why is the definition of a market relevant?  It’s all in how we choose to think about the whole concept of a market.  The various stock markets, for example, do us an incredible convenience.  They provide the opportunity nearly every day to sell shares we own, or buy new shares.  The transaction is typically quick, easy, and really quite cheap.  Basically, stock markets offer what we call “liquidity,” which is the ability to quickly convert your asset to cash.

In exchange for the convenience of liquidity, we are subjected to the daily drumbeat of good and bad market news, along with favorable and unfavorable valuations on everything we own each and every day.  Stock prices in particular can be very close to the actual value or very far from actual value of a company at any point in time.  Over longer horizons, they will tend to follow the growth in the value of a company, but in any shorter period they can drift quite a lot.

In contrast to the stock market, real estate transactions are generally not quick, easy, definitely not cheap and, by the nature of real estate, they are local.  In other words, liquidity is low in most real estate markets.  If the real estate market was more like the stock market, someone would knock on your door each morning offering you a new price for your house.  It might be higher than you expect, or lower.  If someone offered you a price you knew was too low, would you sell because of the new price?  Would you even worry about it?  Unless something has changed in the neighborhood, you probably would not give it a second thought.  You are likely to wait for a more reasonable offer from another buyer.    

The key takeaway is to think of financial markets and investments much more like real estate.  Despite the media shouting S&P, NASDAQ, and DJIA indexes at you, the market price of your assets today is only an opportunity to sell or buy, and certainly not indicative of true value.  Remember, the financial markets only provide a price and liquidity, which is convenient.  But if you have no need for your invested money for several years, you certainly do not need to pay attention to the daily financial news. 

So back to the original question – would it worry you if the stock market was closed for an extended time?  It should only concern you if you needed the cash during that time.  Otherwise, you still own your assets, and the business you own is still operating.  Your worrying energy would be better spent elsewhere.

If you want to have a coffee and debate about how long you should go between looking at the value of your holdings, give me a call at 920-617-6830.

Patrick Stoa  

This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note that direct investment in an index is not possible.