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Guarding Your Wealth for Senior Citizens
Don’t Let Fear of Losing Money Keep You from
Investing
Risk can and should be managed as we do other things in
life
By Jeffrey D. Voudrie, CFP
 June 6, 2007 - Millions of people fail to own stock
market based investments because they fear losing their money. That’s
understandable. Lots of people lost 30%, 40%, 50% or more between 2000
and 2002. But it doesn’t have to be that way! Don’t let the fear of
losing money keep you from an investment that can help you better reach
your financial goals. Read on to see how.
Risk can and should be managed. We do it every day
in other areas of our lives. For instance, we manage the risk of getting
hurt in a car wreck by putting on seat belts. We manage the risk of our
house burning down with fire insurance. But somehow we throw out such
common sense when investing in the stock market!
There are many ways to manage the risk of owning a
stock. One traditional way is by spreading your money among several
different stocks. This is called diversification. If you have 10
different stocks and something happens to one, hopefully the other 9
will be OK.
A second way is through Asset Allocation. This
means that you should own a mix of bonds, real estate and equities
because they go up and down for different reasons. Typically, if stocks
go down, bonds go up.
Almost everyone utilizes diversification and asset
allocation to minimize risk. But don’t stop there. Don’t have a false
sense of security because your advisor tells you that your account is
diversified. Taking one or two additional steps will make the difference
between breaking out in a cold sweat and sleeping like a baby during a
serious market decline.
One additional step is to have a pre-defined level
at which the investment will be sold. This is referred to as a
‘stop-loss’. Some of you may be familiar with it, but have you thought
about it in terms of how much money you have at risk?
For instance, if you had $10,000 invested in Enron,
how much money were you at risk of losing? It was $10,000 because a
company went bankrupt and the price of the stock became worthless.
Therefore, every dollar was at risk.
If you had a stop-loss at $9,000 then the stock
would have been sold once it declined to that level. Enron didn’t become
worthless overnight; it declined in value over a period of months.
Relying on diversification and asset allocation would have resulted in a
$10,000 loss. A stop-loss would have resulted in a $1,000 loss. Which
would you prefer?
A second additional step can be taken to keep your
profits from disappearing. It’s referred to as a trailing stop-loss. As
the share price of the stock goes up, so does the level at which the
stock will be sold if it drops in value. Once the trailing stop-loss is
at a point higher than what you invested, your principle is protected.
There are negatives to using a stop loss. The value
of the stock could drop to that level, get sold because of the stop and
then jump right back up in price. But that may be a small price to pay
for the protection it offers. I use sophisticated, multi-stop techniques
to reduce this risk for my clients, but that’s something that’s next to
impossible to do on your own.
Also, a stop-loss doesn’t guarantee that the stock
will get sold at that point. Once breached, the sale is executed at the
next available price. If a stop is at $9 a share and the stock opens the
day at $8, then the sale might be at $8.
Where a stop loss is placed will depend on the type
of strategy being used. If it’s a longer-term investment that you want
to give plenty of room to run, then you might use a 15% stop. If it’s a
shorter-term, more speculative oriented investment you may want a 3%
stop.
The key is that your risk is significantly reduced.
If you knew that your risk of loss was around 5% (or less), wouldn’t you
feel much more comfortable being invested in the stock market?
Like a seat belt and fire insurance, a stop and
trailing stop-loss can drastically reduce the risk of investing. We
would never dream of owning a home and not having fire insurance. We
should approach investing the same way.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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