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Aug 04, 2014

A Question of Risk

The right approach.

Lorraine  Walker First Vice President

Lorraine Walker, CFP®

First Vice President

Wintrust Investments

When one utters the word “risk” in the financial world, it conjures up images of plummeting stock prices and charts resembling the Himalayas; but risk is not always so dramatic. It can often be a quiet, almost unnoticeable factor in even the most conservative of portfolios.

We deal with some level of risk in everything we do in our lives, from driving our cars to eating our meals, but in terms of investments, it is a much more quantifiable concept with actual mathematical formulas for calculating
 the level of individual stock and broad portfolio risk. There are also very specific remedies for dealing with these risks.

Stock portfolios can combat unsystematic risk through diversification and well-structured asset allocation. Bond portfolios, though generally perceived as having a lower level of risk than their stock heavy counter parts, still contain hazards.

One of the most insidious forms of risk is “opportunity cost,” or the idea that your first choice is actually a better alternative forgone. For example, holding an over-weighted position in cash may seem like a very prudent move in a volatile market and it certainly does reduce volatility. However, if that cash could have earned a higher return invested, one has accomplished nothing more than to lose money safely.

The proverbial “cash under the mattress” may have crossed even the most rational minds over the last four years, but cash stays stagnant while the price of the goods it provides fluctuates. With any increase in 
prices your cash is effectively worth less, not because there is less cash, but because it can provide less of what you actually need.

Preparing for and managing risk in all its forms is an important part of any financial plan. Choosing to drive a car is a risky, but necessary, endeavor. The risk does not deter us from the activity; we simply take precautions for our safety.

Work with one of our Financial Advisors to review your financial plan. You may find a financial seat belt is in order, rather than forgoing the drive completely.

 

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