Page 138 - March_2023

FINANCIAL PLANNING
WHAT’S YOUR RISK SCORE?
by Cade Peterson, Financial Advisor
Do you know how risky your investments are? Do you know the risk of having too much cash in your bank account? These are serious
WHAT IS RISK?
When I ask people what risk is, some respond with the hand motion of throwing dice. Risk that you are going to lose all your money. Risk that your investments aren’t going to serve their intended purpose. The actual definition of risk is a change that an outcome or investment’s actual gains will differ from
an expected outcome or return. It doesn’t say anywhere in that definition that risk is losing all your money with your investments.
There are several different types of risk,
but I’m only going to unpack two of them – market risk and purchasing power risk. Market risk is the one people are familiar with when they invest in the stock market. If you have a 401k, 403b, 457, IRA, or Roth IRA and they
The next type of risk I’d like to discuss is purchasing power risk, or inflationary risk. If you have a pile of money sitting in the bank, don’t mistake this for being risk-free. I’m aware that this money is FDIC insured up to a certain amount and the bank is a very safe place to store your assets. However, we have all been made well-aware this last year how much of an effect inflation can have. At one point, cash in the bank was losing roughly 9% per year. The federal reserve has a target of 2%. Even then, your cash in the bank is losing its value. If you have $1 million in the bank, then you might believe that you are sitting in a great spot, which you are. If the consensus is to leave the money in the bank and slowly draw it
questions to consider as an investor. Every portfolio carries a certain amount of risk. Real estate investments carry risk, the stock market carries risk, you can even tie risk to cash that you have in your safe. If you want to stay ahead of the curve, it’s important to pay attention to the risk you are comfortable with and if it matches up with your investments, no matter what they may be. I’d like to break down the importance of knowing your risk tolerance, how you’re currently invested (if at all), and how your goals affect your risk over time.
are invested, they will most likely carry market risk. This means you could wake up tomorrow and the value could be lower than it was the day before. The same goes for real estate. You might not see it on the news every day, but you can bet that the value of your home is fluctuating every day. Market risk can vary
by a large margin. This is one of the major reasons why it’s important to have a risk score. A relatively high-risk score means your market risk is going to be more significant than if you have a lower risk score.
down with living expenses, then we have become a victim of purchasing power risk. I like to refer to this as death by a thousand cuts. The first few years won’t have a major impact but after 5, 10, or 15 years, it will make a huge difference. The average price of a gallon of milk in the United States is $3.59. The average price of a dozen eggs is anywhere between $4 and $9. In the year 2040, do you think these prices will be the same as they are now? I know I don’t. A cardinal rule is to shoot to have your assets
One of the main reasons why you should have a risk score is to feel comfortable with the way your assets are positioned.
136 SPEEDHORSE March 2023