RJS 8-23-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
the assets safely. I've been an insurance agent for over
twenty four years. During that time, I've learned a few
insurance strategies, like using annuities as safe money harbors, or

(00:21):
using cash value life insurance to supplement retirement income. Just
a reminder, you can call our office at five six
three three three two two two zero zero if you'd
like to enroll into one of my virtual Medicare community
meetings I give two every month via zoom, or you
can email me at Craig at Craigshillig dot com and

(00:45):
that's my name, cr Aig at cr AI G S
c h I L l I G dot com. Today
I'd like to talk about risk, and I'll share with
you ten terms that every investor should know understanding risk.

(01:06):
Few terms in personal finance are as important or used
as frequency frequently as the word risk. Nevertheless, few terms
are as imprecisely defined. Generally, when financial professionals or the
media talk about investment risk, their focus is on the

(01:26):
historical price volatility of the asset or investment under discussion.
Financial professionals may label as aggressive or risky an investment
that it has been prone to wild price gyrations in
the past. Presumed the presumed uncertainty and unpredictability of this

(01:51):
investment's future performance is perceived as risk. Assets characterized by
prices that historically have moved within a narrow range of
peaks and valleys are generally considered more conservative. Unfortunately, this
explanation is seldom offered, so it is often not clear

(02:12):
that the volatility yardstick is being used to measure risk.
Before exploring risk in more formal terms, a few observations
are worthwhile. On a practical level, we can say that
risk is the chance that your investment will provide lower
returns than expected, or even a loss of your entire investment.

(02:38):
You probably also are concerned about the chance of not
meeting your investment goals. After all, you are investing now
so you can do something later, for example, pay for
college or have a nice retirement. Every investment carries some
degree of risk, including the possible loss of principle, and

(03:00):
there can be no guarantee that any investment strategy will
be successful. That's why it makes sense to understand the
kinds of risk, as well as the extent of risk
that you choose to take, and to learn ways to
help manage it. What you probably already know about risk,

(03:20):
Even though you might never have thought about this subject.
You're probably already familiar with many kinds of risk from
life experiences. For example, it makes sense that a scandal
or a lawsuit that involves a particular company will likely
cause a drop in the price of that company's stock,
at least temporarily. If one car company hits a home

(03:43):
run with a new model, that might be bad news
for competing automakers. In contrast, an overall economic slowdown and
stock market decline might hurt most companies and their stock prices,
not just in one in industry. However, there are many
different types of risks to be aware of. Volatility is

(04:06):
a good place to begin as we examine the element
of risk in more detail. What makes volatility risky? Suppose
you had invested ten thousand dollars in each of two
mutual funds twenty years ago, and that both funds produced
average annual returns of ten percent. Imagine further that one

(04:27):
of those hypothetical funds, Steady Freddy returned exactly ten percent
every single year. The annual return of the second fund,
Jeckyl and Hyde alternated five percent one year fifteen, the next,
five percent, again in the third, and so on. What
would these two investments be worth at the end of

(04:50):
the twenty years sounds like a story problem from math class.
It seems obvious that the average annual return of two
investments are identical, their final values will be two. But
this is a case where intuition is wrong. If you
plot the twenty year investment return in this example on
a graph, you'll see that Steady Freddie's final value is

(05:13):
over two thousand dollars, more than that from the variable
return of Jeckyal and Hide. The shortfall gets much worse
if you widen the annual variations plus or minus fifteen
percent instead of plus or minus five percent. This example
illustrates one of the effects of investment price volatility. Short

(05:35):
term fluctuations in returns are a drag on long term growth,
although past performance is no guarantee of future results. Historically,
the negative effect of short term price fluctuations has been
reduced by holding investments over longer periods. The counting on

(05:57):
a longer holding period means that some additional planning has
called for. You should not invest funds that will soon
be needed into a volatile investment, Otherwise you might be
forced to sell the investment to raise cash at a
time when the investment is at a loss. Other types

(06:18):
of risk Here are a few of the many different
types of risk market risk, inflation risk, interest rate risk,
reinvestment rate risk, default risk, liquidity risk, political risk, and
currency risk. Market risk this refers to the possibility that
an investment will lose value because of a general decline

(06:41):
in financial markets due to one of the more economic, political,
and or other factors. Inflation risk is defined as sometimes
known as purchasing power risk. This refers to the possibility
that prices will rise in the economy as a whole,
your ability to purchase goods and services would decline. For instance,

(07:05):
your investment might yield a six percent return, but if
the inflation rate rises to double digits, the invested dollars
that you got back would buy less than the same
dollars today. Inflation risk could be overlooked by fixed income investors,
who may shun the volatility of the stock market completely.

(07:28):
Interest rate risk. This relates to increases or decreases in
prevailing interest rates and the resulting fluctuation of an investment,
particularly bonds. There is an inverse relationship between bond prices
and interest rates. As interest rates rise, the price of
bonds typically fall. As interest rates fall, bond prices will

(07:51):
tend to rise. If you sell your bond before it matures,
you run the risk of the loss of principle if
interest rates are higher than when you purchase the bond.
And one additional thing about bonds, I'm going to throw
in there if you do recall back in twenty twenty two,
bonds and stocks went down at the same time, keep

(08:14):
that in mind. Reinvestment rate risk this refers to the
possibility that funds might have to be reinvested at a
lower rate of return than that offered by the original investment.
For example, a five year, three point seventy five percent
bond might mature at a time when an equivalent new

(08:35):
bond pays just only three percent. Such differences can in
turn affect the yield of a bond fund. Credit risk,
also called default risk, this refers to the risk that
the bond issuer will not be able to pay its
bond holders interest or repay the principle liquidity risk. This

(08:59):
refers to how easily your investments can be converted into cash. Occasionally,
and more precisely, the definition is modified to mean how
easily your investment can be converted to cash without significant
loss of principle. Political risk this refers to the possibility

(09:20):
that new legislation or changes in foreign governments will adversely
affect companies you invest in or financial markets overseas. Currency
rate risk for those making international investments, this refers to
the possibility that the fluctuating rates of exchange between US
and foreign currencies will negatively affect the value of your

(09:44):
foreign investment as measured in US dollars. Let's talk about
the relationship between risk and reward. In general, the more
risk you're willing to take on whatever type and however define,
the higher your potent returns as well as your potential losses.

(10:05):
This proposition is probably familiar and makes sense to most
of us. It is simply a fact of life. No
sensible person would make a make a higher risk rather
than a lower risk investment without the prospect of receiving
a higher return. That is the tradeoff your goal is
to help enhance returns without taking on an inappropriate level

(10:30):
of or type of risk. Understanding your own tolerance for risks.
The concept of risk tolerance is twofold. First, it refers
to your personal desire to assume risk and your comfort
level with doing so. This assumes that risk is relative

(10:50):
to your own personality and feelings about taking chances. If
you find you can't sleep at night because you're worrying
about your investments, you may have assumed too much risk. Second,
your risk tolerance is affected by your financial ability to
cope with the possibility of loss, which is influenced by
your age, stage in life, how soon you'll need the money,

(11:15):
your investment objectives, and your financial goals. If you're investing
for retirement and you're thirty five years old, you may
be able to endure more risk than someone who is
ten years away or ten years into retirement because you
have a longer time frame before you will need the money.

(11:37):
With thirty years to build a nest egg, your investments
have more time to ride out short term fluctuations and
hope of a greater long term return. Reusing risk through diversification,
don't put all your eggs in one basket, You can
potentially help offset the risk of one investment by spreading

(11:58):
your money among several asset classes. Diversification strategies seek to
take advantage of the fact that forces in the market
do not normally influence all types or classes of investment
assets at the same time or in the same way,
though there are often short term exceptions. Swings in overall

(12:21):
portfolio return can potentially be moderated by diversifying your investments
among assets that are not highly correlated. Ie. Assets with
values may behave very differently from one another. In a
slowing economy, for example, stock prices might be going down

(12:41):
or sideways, but if interest rates are falling at the
same time, the price of bonds likely will rise. Asset
allocation and diversification do not guarantee a profit or protect
against investment loss, but it can help you manage the
level and types of risk you face. In addition. In

(13:04):
addition to diversifying among asset classes, you can diversify within
an asset class. For example, the stocks of large, well
established companies may behave somewhat differently than stocks of smaller
companies that are growing rapidly, but that also may be

(13:24):
more volatile. A bond investor can diversify among treasury securities,
more risky corporate securities, and municipal bonds, to name a few.
Diversifying within an asset class could help reduce the impact
of your portfolio of any one particular type of stock, bond,

(13:46):
or mutual fund. Evaluating risk Where to find information about investments.
You should become fully informed about an investment product before
making a decision. There are numerous sources of information. In
addition to information available from the company offering an investment,
for example, the perspectives of a mutual fund. You can

(14:09):
find information in third party business and financial publications and websites,
as well as annual and other periodic financial reports. The
Securities and Exchange Commission can also supply the information. I'll
just note on that you'd be amazed how many people
I know that invest in stuff and they never read

(14:31):
their perspectives, read your perspectives, sometimes just look at it.
It kind of really spells out what the investment you
have and how the money is invested. Let's talk about
ten terms every investor should know portfolio, stock, bond, cash,

(14:53):
mutual fund, exchange traded fund or ETFs, dividends, yield and
in as well as bear and bull markets. If you're
new to investing, you may encounter some unfamiliar jargon. Understanding
the following terms may help you become a more confident investor.

(15:16):
So portfolio, an investment portfolio is a collection of investments
owned by an individual or an institution. Typically, a portfolio
comprises of a mix of asset classes such as stock, sponds,
and cash, and investors risk tolerance, time horizon, and investment
goals generally determine a portfolio's asset allocation. Stock a stock

(15:42):
is a security that represents ownership or equity in a corporation.
An investor who purchases shares of stock owns a piece
of the company and has a claim on a portion
of the assets and earnings. Shareholders are subject to the
potential benefits and risks of that position, which means they
can make money if the company does well, or lose

(16:05):
money if the company does poorly. Bond a bond is
a fixed income security issued by a government entity or
corporation to raise money needed for ongoing operations or to
finance new projects. Investors who buy bonds are essentially lending
money to the issuing organization. And become a creditor. Bondholders

(16:30):
typically receive interest payments at regular, predetermined intervals unless the
bond issued defaults. These payments are based on a fixed
annual interest rate, also known as the bond's coupon rate.
Bond holders can expect to be paid the bond's full
face amount at its stated maturity date, barring default by

(16:55):
the issuer. Cash is another investment type or asset class.
It includes currency and cash alternatives that typically offer lower
risk and higher liquidity. Some examples of common cash alternatives
are savings accounts, certificates of deposit CDs, and US Treasury

(17:20):
bills known as T bills. Mutual fund a mutual fund
is a collection of stocks, funds, and other securities purchased
and managed by an investment company with funds from a
group of investors. Shares are typically bought from and sold
back to the investment company at the end of the
trading day, with the price determined by the nev net

(17:43):
asset value of the underlying securities. Mutual funds offer investors
the advantage of diversification and professional management. Diversification is a
method used to help manage investment risk. It does not
guarantee a profit or protect against investment loss. ETFs, an

(18:07):
exchange traded fund, is also a portfolio of securities assembled
by an investment company, but unlike mutual funds, ETF shares
can be traded throughout the day on stock exchanges like
individual stocks, and the price may be higher or lower
than the net asset value because of supply and demand.

(18:31):
ETFs typically have lower expense ratios than mutual funds, but
you must pay a brokerage commission whenever you buy or
sell an ETF, so your overall costs could be higher,
especially if you trade ETFs frequently. Dividends dividends are the
distributions of a company's earnings to shareholders, generally paid in

(18:55):
cash or additional shares of the company stock on a
quarterly basis. The difendend amount per share is decided by
the company's board of directors. Dividends must be reported as
income by shareholders in the year received. Investors often view
dividend payments as an indicator of the company's financial strength

(19:17):
and future prospects. I'll talk about dividends for a second.
If you buy life insurance from a dividend paying company,
that means on top of especially when you're talking about
a permanent policy, on top of interest in the policy,
they will also pay dividends, which means your cash values

(19:39):
will be higher. Also, remember, dividends are usually taxed lower
than income tax. That's why you hear about a lot
of wealthy people that take dividend income that lowers their
overall income tax rate because dividends are taxed lower than

(20:03):
regular income tax. Keep that in mind. Dividends are good.
They're always good. Don't forget that. Yield generally the yield
of the amount of current income provided by investment. For stocks,
the yield is calculated by dividing the total of the
annual dividends by the current price. For bonds, the yield

(20:24):
is calculated by dividing the annual interests by the current price.
The yield is distinguished from the return, which includes price
appreciation or depreciation. Investments seeking to achieve higher yields also
involve a higher degree of risk. Index and index is

(20:45):
a statistical composite used to attract changes in economic conditions,
such as inflation or financial markets over time. Investors use
some indexes as benchmarks against which the performance absurd investments
can be measured. For example, the S and P five
hundred index is considered to be representative of the US

(21:08):
stock market in general, but there are hundreds of other
indices based on a wide variety of asset classes, stocks
and bonds, market segments large and small cap, and different
styles of indexes growth value, world global, stuff of that

(21:31):
nature bear in bowl markets, A bear market generally defined
as a period in which the prices of securities are falling,
resulting in a downturn of twenty percent or more in
several broad market indexes over a period of several months
or longer. A bowl market is a sustained period in

(21:54):
which the market is rising and investor optimism is high,
usually occurring over several months or years. Either of these
market trends can influence the attitudes and behaviors of investors.
If we go back to all the way back to
twenty eighteen, the market has for the most part been

(22:16):
a bowl market. Now, if we go back to twenty
twenty two, we did kind of have a little blip there,
but it was very short term. But please keep that
in mind, because the market won't keep going up forever.
We will have another adjustment and or a bear market.

(22:38):
If I knew when that was I probably wouldn't be
here talking to you, So just keep that in mind.
Upcoming shows, I'll be talking next month about life insurance.
September's Life Insurance Awareness Months, so stay tuned for that.

(22:58):
Nobody wants to talk about life insurance. I get it,
but everybody needs it. Everybody should want it, not that
everybody has it. If you don't have life insurance, next
month would be a good time to reach out to
your advisor and go get some. Life insurance is an
asset that you can take with you through your life,

(23:21):
especially if you buy it correctly. You ensure your car,
you ensure your house, you ensure yourself against liability. Why
would you not ensure your life. Either somebody relies on
you or you rely on somebody. In either case, life

(23:42):
insurance still solves both those problems. Please keep that in mind,
don't forget. I give monthly virtual meetings regarding Medicare. I
give presentations on two different companies every month, and one
meeting I will cover Medicare supplement plans with a standalone
drug plant. That meeting is sponsored by well Mark United

(24:04):
Healthcare as a sponsor. For my other virtual meeting, I
focus on Medicare advantage plans known as Medicare Parts C
and I cover the benefits of that platform. My next
upcoming dates will be September sixteenth and eighteenth. In October
ninth and October fourteenth, I'll be giving Medicare meetings on

(24:25):
those four dates. You can call our office at five
six three three three two two two zero zero for
the zoom meeting codes and additional dates and times. You're
also welcome to email me at Craig at Craigshillig dot
com and that's my name, cr Aig at cr ai

(24:47):
g scchi llig dot com. I'd be happy to send
you the virtual zoomlink meeting codes. This is Craig Shillig
with Safe Money.