Am I Taking Too Much Risk?

Financial Advisor Steve Sexton sheds light on the financial risks you could be taking, and are unaware of.

San Diego, CA. – Retirees and those soon to be retired are struggling to figure out what amount of risk is really acceptable for them in these turbulent economic times.  Plus, the whole idea of diversification and risk management are proving to be more complex than originally thought.  If these are questions you have been struggling with, then Steve Sexton may provide you with some simple straightforward guidance on how to navigate these tricky economic times.

“Financial loss associated with taking risk is often overlooked by folks who are exposed to financial markets,” said Steve Sexton, President of Sexton Advisory Group.

Let’s start with “the math” and explain the realities of loss.

“As you can see, it takes MORE gain to recover from a loss than the original loss itself,” said Sexton. “This seems illogical, so let’s walk through a simple illustration:

If you have $100,000 invested into a mutual fund and that fund experiences a 20% loss, the resulting value on your next statement from the mutual fund company will show an account value of $80,000.

So, will a 20% gain get you back to even?  No.  Let’s crunch the numbers:

$80,000 x 20% = $16,000

$80,000 + $16,000 gain = $96,000 ($4,000 LESS than your original investment)

As we get older, our time horizon gets less tolerant to market losses due to the amount of time it may take to get a significant double-digit return just to get back our own money.”

The best defense to market losses is often thought to be proper asset allocation and diversification.

“I agree that risk can be mitigated by where you put your money, but, often, diversification is done by buying multiple funds all exposed to the same market risk and really providing little cushion to the economic risks associated with investing in the market,” said Sexton.

An old formula, with a new twist, may provide a greater level of safety.  The old rule of thumb was simply allocate your age to safe savings vehicles like CDs, bank accounts and find insurance company products like cash value life insurance and/or annuities.

As an example, a 65-year old couple using this formula would put 65% of their money into these safe vehicles and allocate only 35% of their assets to risk.  So, the risk assets are calculated by taking 100 minus your age.

The new twist is what to do with the 35% you allocate to risk-based retirement funds.  Based on new findings, like those recently published by the Putnam Institute, about how much money should be at risk in the stock market, they concluded (as reported in MarketWatch July 11, 2011 article: Retirees Need Less Stocks, More Annuities) “Retirees should invest just 5% to 25% of their portfolio in stocks, or at least that’s the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals.”
A possible way to build even greater security into your retirement planning would be to only put into stocks and stock mutual funds 100 minus your age.  If you add this to the tried and true safety formula, the math on a $100,000 account for a 65-year old would look like this:

This formula appears to conform to the new research suggesting the reduction of overall market risk when future retirement income is the ultimate goal of your retirement planning. Did you have the above critical piece of information on risk when you made your past investment decisions?  Wouldn’t you agree that you should know about it prior to making financial decisions?

For more information on this topic, or to learn how Steve Sexton can help, please visit www.sextonadvisorygroup.com.

For media inquiries only, please contact Jenn Horner at [email protected].

About Steve Sexton:

Steve Sexton has over 15 years of experience in the financial services industry and holds multiple licenses and designations. His company, Sexton Advisory Group has grown steadily over the last eight years and has seven offices serving Riverside and San Diego Counties.

Sexton is a well known media expert and has been asked to appear on a variety of Southern California media over the past three years to share his expertise. Steve hosts “Winning In Life Radio with Steve Sexton on 1170am KCBQ and Ch6 CW Daily Living Show” Money Minute” segment in San Diego, Ca

Sexton also works with many charities. He has sponsored special events for various charities, such as A Salute to the Military, benefitting Pat Boone’s Ryan’s Reach charity, events for Hospice of the Valleys and many more.