"Risk" is a term we hear so often, and yet not many of us really know what it means. Usually, we all think of "risk" as losing money because of a bad investment decision or the economy tanking, like we've all seen happen to our houses.
And sure, this type of risk is real, yet it is not the only type of "risk" that's out there, potentially waiting to hurt your security. Also, most of us have an understanding that usually, (but not always) the more "risk" you take, the higher the potential reward. You know, like investing in your brother-in-law's "can't miss" pay phone business, or going short on gold futures on margin. You might get killed, but if the deal works, you might get rich.
This rule is pretty solid, but is not always the case. For example, let's discuss the only risk you may be taking, that violates the rules of risk/reward. A risk, which is the most common risk we see people taking, and that offers a much greater chance of loss, without the equally greater chance of making money! What risk is this? The risk of NOT BEING DIVERSIFIED! Let's explain the simple concept of diversification. It is simply the concept of not putting all your eggs in one basket!
We know this sounds like a kindergarten lesson, but please bear with us.Even though being diversified sounds like a basic foundation of your investments, I will tell you that over 90% of the clients we see are so poorly diversified that they are at great risk!See, if you have most or all your money tied up in the company you work for, for example, you are at great risk! We see people all the time who work for a company, have all of their insurance benefits through the company, have their profit sharing plan from the company, and own a bunch of the company's stock both personally and in their 401(k) plan or whatever! Or, putting all of your money in the market as a whole. We still consider this as one investment, if that's all you have, even If you have many stocks in your portfolio. If your company or the market as a whole sucks wind, you are at great risk!
Does any of this mean more to you in light of the 2008, and 2011 stock market roller coasters? There is little if any potential reward for this family to keep their whole financial security tied up in this one company, or one type of investment.So many people are, taking all equally high potential of reward!
This lack of diversification can be the most deadly risk you can ever take!You must be realistic in your assessment of how you're diversified. You cannot think you're safely diversified if you have money in six different banks! While you've diversified amongst banks, you ARE NOT DIVERSIFIED AMONGST TYPES OF ASSETS!
See, true diversification consists of being diversified by the different types and forms of investments! For example, someone who has money split up between bank CD's, annuities, life insurance cash values, stocks, bonds, real estate, foreign instruments, etc., etc... is true diversification!
Let's look at an example of how splitting up your money into different asset types could add incredible safety!Let's say that some investor has $100,000 to invest, and one option was to put it into a relatively low risk, low yielding account, and in the other case, splitting it up into five $20,000 chunks.
And, let's assume that two of the five investments in the diversified option don't make any money, and the other three do as shown.Invest $100,000 @ 4% For 20 Years = $219,112 Compared To Diversifying Over 20 Years:
Invest # 1 - $20,000 @ Total Loss = 0
Invest # 2 - $20,000 @ 0% = $20,000
Invest # 3 - $20,000 @ 5% = $53,065
Invest # 4 $20,000 @ 10% = $134,550
Invest # 5 - $20,000 @ 12% = $192,926
TOTAL $400,541
Do you see how, even though one investment was a total loss, and one made nothing, this investor still made more money by diversifying! (NOTE- THIS IS AN EXAMPLE ONLY FOR ILLUSTRATION PURPOSES, AND IS NOT INTENDED TO BE MAKING ANY PREDICTIONS OR PROJECTIONS. NO RETURNS ARE IMPLIED OR STATED.)
Now, I want to ask you some serious questions. Are you truly diversified? Do you really know? If not, you may want to have your whole portfolio and financial situation reviewed so you can maximize your potential and minimize your risk. Additional information is available to your at http://www.877Holmes8.com.
And sure, this type of risk is real, yet it is not the only type of "risk" that's out there, potentially waiting to hurt your security. Also, most of us have an understanding that usually, (but not always) the more "risk" you take, the higher the potential reward. You know, like investing in your brother-in-law's "can't miss" pay phone business, or going short on gold futures on margin. You might get killed, but if the deal works, you might get rich.
This rule is pretty solid, but is not always the case. For example, let's discuss the only risk you may be taking, that violates the rules of risk/reward. A risk, which is the most common risk we see people taking, and that offers a much greater chance of loss, without the equally greater chance of making money! What risk is this? The risk of NOT BEING DIVERSIFIED! Let's explain the simple concept of diversification. It is simply the concept of not putting all your eggs in one basket!
We know this sounds like a kindergarten lesson, but please bear with us.Even though being diversified sounds like a basic foundation of your investments, I will tell you that over 90% of the clients we see are so poorly diversified that they are at great risk!See, if you have most or all your money tied up in the company you work for, for example, you are at great risk! We see people all the time who work for a company, have all of their insurance benefits through the company, have their profit sharing plan from the company, and own a bunch of the company's stock both personally and in their 401(k) plan or whatever! Or, putting all of your money in the market as a whole. We still consider this as one investment, if that's all you have, even If you have many stocks in your portfolio. If your company or the market as a whole sucks wind, you are at great risk!
Does any of this mean more to you in light of the 2008, and 2011 stock market roller coasters? There is little if any potential reward for this family to keep their whole financial security tied up in this one company, or one type of investment.So many people are, taking all equally high potential of reward!
This lack of diversification can be the most deadly risk you can ever take!You must be realistic in your assessment of how you're diversified. You cannot think you're safely diversified if you have money in six different banks! While you've diversified amongst banks, you ARE NOT DIVERSIFIED AMONGST TYPES OF ASSETS!
See, true diversification consists of being diversified by the different types and forms of investments! For example, someone who has money split up between bank CD's, annuities, life insurance cash values, stocks, bonds, real estate, foreign instruments, etc., etc... is true diversification!
Let's look at an example of how splitting up your money into different asset types could add incredible safety!Let's say that some investor has $100,000 to invest, and one option was to put it into a relatively low risk, low yielding account, and in the other case, splitting it up into five $20,000 chunks.
And, let's assume that two of the five investments in the diversified option don't make any money, and the other three do as shown.Invest $100,000 @ 4% For 20 Years = $219,112 Compared To Diversifying Over 20 Years:
Invest # 1 - $20,000 @ Total Loss = 0
Invest # 2 - $20,000 @ 0% = $20,000
Invest # 3 - $20,000 @ 5% = $53,065
Invest # 4 $20,000 @ 10% = $134,550
Invest # 5 - $20,000 @ 12% = $192,926
TOTAL $400,541
Do you see how, even though one investment was a total loss, and one made nothing, this investor still made more money by diversifying! (NOTE- THIS IS AN EXAMPLE ONLY FOR ILLUSTRATION PURPOSES, AND IS NOT INTENDED TO BE MAKING ANY PREDICTIONS OR PROJECTIONS. NO RETURNS ARE IMPLIED OR STATED.)
Now, I want to ask you some serious questions. Are you truly diversified? Do you really know? If not, you may want to have your whole portfolio and financial situation reviewed so you can maximize your potential and minimize your risk. Additional information is available to your at http://www.877Holmes8.com.
Harry Holmes has been a Financial Planner in the Inland Empire since 1990. He is an Enrolled Agent of the IRS, helping Mr. Holmes to create solid, tax consequence Wealth Building plans at all levels. Learn more about his practice at http://www.877Holmes8.com.
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