WHEN YOU TAKE A RISK
You take a risk every time you get out of bed in the morning, but today let's limit risk-taking to finances and especially the stock market.
Whether it is stocks, exchange traded funds (ETFs) or the supposedly safe mutual funds there is always a risk. The amount of that risk depends on you. You didn't know that? Well, it's true.
When money is put into a 401K (assuming you have some say about which fund your money is deposited) it is not safe from loss. Funds have promoted the myth they are safe.
There are many fund and stock owners who watched their cash disappear from 2000 to 2003. Even when the general market is advancing there are sectors that will not participate and others that will decline.
Do you know that 80% of all mutual funds do not perform as well as the S&P500 Index and it lost 40% of its value in the 2000 bear market. What will happen if there is another bear market?
Wall Street likes to call anyone who buys stocks or funds for retirement ‘investors'. These folks are really long terms gamblers.
When a person opens an account no broker or fund manager
ever talks about risk or protecting the account from large losses. No matter where anyone puts his money it must be determined how much loss will be taken before the position is abandoned. Don't dive in the water until you know how deep it is.
There are times when money is invested and it is known that it is possible to lose it all. But it was known (I hope) before cash was put in. Other times the risk may be estimated at 3 to 1 or 5 to 1 or some reasonable amount. Two to one is not a good bet.
Few brokers or financial planners ever talk about risk protection. Small losses will not hurt a retirement portfolio, but big losses can be devastating. If a 50% loss is experienced it means a 100% profit must be found to make up for that loss. Don't let any financial "expert"¯ sweet talk you into holding any loss greater than 10 or 15%.
When there is risk the risk taker should be informed of the amount of risk and if there is a way to mitigate it. That is usually not the way Wall Street plays the game. Brokers are not taught to have investors sell out of losing positions because the brokerage firm continues to profit even while the client loses money.
There is one course of action for the investor. He must ask for a written exit strategy from his broker or financial planner. This will ensure it will be carried out.
Any intelligent investor will always have a plan to limit risk in any situation.
Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!"¯has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at no charge on www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.
Copyright 2008 All rights reserved.