Q. When you invest, you put your money at risk. Once you retire, the danger in any risk is intensified.
While there‘s no free lunch in the world of investing, it's best for retiree investors to understand the risk that they face and how to guard against each of them.
Capital loss -- You can lose most of your money if a bear market hits and the market plunges. During the Great Depression, the market went down 92%. In 2000, the market dropped 49%, and in 2008, it fell 57%. Those drops translated to capital losses for many investors.
Inflation loss — When people invest in "super safe investments" like CDs, they want protection from capital loss. However, inflation can cut their money in half about every 15 years. If you've been paying bills for a while, you know it costs more to live these days. That's not going to stop.
Liquidity risk — Sometimes you need money, but your investment has a five- or 10-year waiting period and you can't get at it. If you're retired, you should be especially aware of this type of risk. What if you have a health crisis and need your money now?
Legislative risk — Ever considered investing in something because it's got a tax loophole or legislation that makes it attractive? I believe you should never put money in those investments, because what Congress giveth, Congress taketh away. Back in the '80s, some oil and gas partnerships had 2-to-1 write-offs (you put $1 in and got $2 in tax savings). When Congress put the kibosh on those partnerships, many of those investments became worthless.
Interest rate risk — Many of you are experiencing issues with this risk right now. When you invested in CDs five or 10 years ago, you made somewhere between 5% and 8% interest. Now you renew at 1.5% if you're lucky.
How should retiree investors deal with these five types of risks? Please see our next blog post discussion.