Finances at Four: The 4 Big Risks To Investing, What You Need to Know
Investing your hard-earned money can be great when there’s a payout, but we all know there are inherent risks.
Rob Grostick, with Carroll Retirement Plans & Investments, has a list of the four big risks of investing you need to know.
When you look at the stock market day to day, there’s no question there’s some volatility there.
“We see the Dow Jones went up x amount of points or went down x amount of points,” Grostick says. “If you have a million dollar portfolio, and all of a sudden the market takes a big hit—maybe it’s 2007, 2008, where markets are down 40 percent—your million is now worth $600,000. That’s called a negative sequence return.”
The second risk you take when you invest money, is called a default risk, which Grostick says is when a company basically goes “kaput” or “belly up.”
“In the last few years we saw the city of Detroit went bankrupt, so bonds, in that case, were adversely affected,” he says. “But that can also happen to stocks. It’s been a long time, but Enron was one a long time ago. Or one of the biggest bond traders in the history of the U.S. markets, Lehman Brothers, went kaput years ago. So it can happen to big companies as well.”
Inflation risk is basically the amount that goods and services go up in any given year.
Grostick says that’s typically about three to four percent annually, so if you’re investments aren’t making that much, you are actually losing purchasing power, not gaining it.
For example, savings accounts.
“If we stick money in a savings account because we want it safe and secure, we’re getting no yield on it, we’re effectively losing purchasing power,” he says. “So the way to avoid that is we need to invest our money.”
Life is short.
We all want to live as long as we possibly can, but there’s a flip-side to living longer.
“A big worry for a lot of people is ‘Am I going to out-live my money?” Grostick says. “What happens if I’m 75, 80, 85 years old and my investments are gone and I have to rely solely on Social Security? Well that’s a pretty dire existence to have to do that.”
Grostick says one way to avoid that is to invest your money and help it grow at a compound rate.
In all, there are a lot of different types of risks to investing. Grostick advises doing your homework and if you’re not comfortable dealing with your finances alone, rely on an advisor.
“Make the best path as you possibly can,” he says.
Watch the video above for more information, or contact Carroll Retirement Plans & Investments for professional help by heading to carrollretirementplans.com.