The Four Investment Risks You Can’t Avoid

by Alexander Green, Chief Investment Strategist
Monday, October 18, 2010: Issue #1368

We’re making money hand over fist – locking in significant double- and triple-digit gains – in our Oxford Trading Portfolio, Seven Deadly Sins Portfolio, Oxford All-Star Portfolio, Momentum Portfolio, Insider Portfolio and our New Frontier Portfolio.

Yet I still talk to investors every day who tell me they’re completely out of the market. When I ask them why, they always give me some variation of the same answer: They just can’t take the risk.

These investors need to wake up and smell the java. There has never been – and never will be – a time when stocks aren’t volatile and the economic outlook isn’t uncertain.

Yet nothing gives a better return over time than great stocks…

Four Wealth-Building Barriers

What these investors may not realize is that by sitting out the stock market rally, they’re taking four significantly greater risks:

  • Purchasing Power Risk

Low inflation isn’t a problem now, but it’s like having a slow leak in your swimming pool. At some point, you’re likely to jump off the diving board and hit concrete.

Even low inflation is slowly draining your purchasing power. You may feel safe sitting in cash, but you’re virtually guaranteeing that inflation will outpace your asset growth. And thanks to our gargantuan budget deficit, we may face sharply higher inflation in the years ahead.

  • Interest Rate Risk

Ben Bernanke and Co. took short-term interest rates to near zero. The average money market account now pays a microscopic .05%. (It will take your money more than 1,400 years to double at that rate.)

And if the Fed decides to raise rates by even one point, it will knock 3% off the value of your Treasury bonds, essentially erasing a year’s worth of returns. Bonds are not a great bet right now.

  • Timing Risk

Every market timer would like to believe that he or she will be in the market for the rallies and out for the corrections. Never did the phrase “more easily said than done” ring truer.

I still talk to investors every week who are waiting for the market’s “final capitulation.” Final capitulation? The Dow is up 70% from the lows of last March. This is a bull market by any definition. Yes, it will end at some point. But if you didn’t catch the lows last year, what are the odds you’ll pick the top of this bull, which may last for years?

  • Shortfall Risk

This is your single greatest investment risk – the possibility that you won’t have enough money to reach your financial goals or support yourself the way you’d like in retirement.

Talk to elderly investors who are counting nickels and the story is virtually always the same. They didn’t save enough and (depending on personality type) they were either too conservative or too aggressive with their money. It’s a sad thing when your golden years are tin-plated and it’s way too late for a do-over.

So what’s the solution?

Think Ahead and Grow Rich

In short, don’t let the perma-bears and the gloom-and-doomers talk you out of achieving your financial goals.

Yes, you should own some gold, some bonds, even some real estate. But if you don’t own stocks, where are you going to generate the returns you need to live the lifestyle you want?

No one can say where the stock market will be 15 days or 15 weeks from now. But think about your retirement. Fifteen years from now, the market will almost certainly be a lot higher.

So stop fretting over the short-term outlook and start putting money to work in great stocks to meet your long-term goals. Financial freedom is about managing investment risk… not avoiding it.

Good investing,

Alexander Green