risk management

Choose Your Risks Wisely

© Can Stock Photo / alphaspirit

When you think about your finances over the course of a lifetime, it is easier to see that risks may only be selected, not avoided.

Our first understanding of risk often relates to fluctuations in value. If you put in a dollar, and the value soon drops to 80 cents or 60 cents, it seems like a clear (and vivid!) loss.

Money buried in a can would never have that kind of risk, yet its purchasing power—what you could buy with it—declines year by year if there is any inflation at all. This kind of damage reminds us of termites, which chew away behind the scenes, causing damage that is not obvious.

Longer term fixed income investments, like bonds, offer interest that may offset inflation in whole or in part. But the value of a bond may change with interest rates. A 3% bond is probably not going to be worth its face amount in a 6% world.

The interesting thing about all these different kinds of risks is that they cannot be entirely avoided, but they may be balanced against each other.

• The things that fluctuate in value may provide growth over the long term to offset inflation.
• Having money in hand when needed may enable us to live with fluctuating values in other parts of our holdings.
• Reliable income helps us avoid excess amounts of money laying around.

We think one of the most valuable lessons about risk is that, on our long term investments, volatility is not risk. If we aren’t retiring for many years, ups and downs in our retirement accounts may not be all that pertinent.

The stock market, measured by either the Dow Jones Average or the S&P 500 Index, has risen three years out of four. There is no guarantee that this general pattern continues, or how results will work out over future periods. But someone that invested ten, twenty or forty years ago may have seen a lot of growth overall, in spite of fluctuations ever year—and some years that were negative.

Clients, if you would like to talk about the balance of risks in your situation or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted.

What You Don’t Know Can Hurt You

© Can Stock Photo / alphaspirit

In 2002 Donald Rumsfeld made headlines when he stood up during a press conference on the case for war against Iraq and proclaimed “there are known unknowns.” At first, this phrase sounds like a silly oxymoron. However, it actually makes a very important distinction. Whenever we are considering our planning, it is important to acknowledge both the risks that we know—the “known unknowns”—and the risks that we don’t—the “unknown unknowns.”

For example, suppose you are thinking about investing in an airline company. You are probably aware of a number of possible risks to an airline: natural disasters, plane crashes, or spikes in fuel prices, to name a few. These are your known unknowns.

Now imagine what happens to your investment if you buy airline stocks and the next day a scientist announces that they’ve built a teleporter that can safely and instantaneously transport people across the globe. Nobody could have foreseen such an outlandish invention—it would be something straight out of science fiction. This would be an unknown unknown, a risk that is so far off your radar you probably would not even think it was worth thinking about.

And you may be right. These risks are by nature rare and unpredictable, so it is practically impossible to plan around them. But it is important to remember that they can and do happen, and to be ready for the possibility. There was a point when heavier-than-air flying machines seemed like an impractical fantasy. Those who bet against the airplane wound up paying for it eventually.

Today, investors and advisor representatives have a wide range of tools to try to quantify the risks of a portfolio. These forecasts are only as good as the models behind them, though—they can only estimate based on the known unknowns, not the unknown unknowns. There is certainly some value in statistical risk analysis, but there is also a real danger in false confidence.

As humans we are pretty bad at understanding probability: a 5-10% chance sounds pretty unlikely, but in practice a 1 in 20 chance is not nearly as rare as we think it is. When we hear numbers like 95% we tend to think of them as being a safe bet. That’s not much comfort if you turn out to be the 1 in 20, though.

Here at Leibman Financial, we have a different approach to risk analysis. It goes something like this:

Everything we invest in has risks. Many of the investments we prefer are more volatile than average. You may lose money.

We do not make these statements because we are fishing for excuses. We are proud of our results and stand behind them. We want you to continue to do business with us, and believe the best way to ensure this happens is to make money for you.

We like to think we do a pretty good job. But we cannot guarantee our results, and we will not inspire false confidence by guessing numbers for you. If you have any concerns about investment risks, feel free to call or email us and we will discuss them to the full extent of our knowledge and understanding.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Stock investing involves risk including loss of principal.

Professionalism? Or Pandering?

© Can Stock Photo / stokkete

Two popular trends in the investment business may be affecting the financial health of clients. In my opinion the use of “risk tolerance assessment” tools, combined with the trend toward model portfolios, may be good for advisors and bad for the customer.

Many advisors use risk tolerance assessments. The issue is that when markets are lovely and rising, these tests have the potential to show that risk tolerance is high based on the client’s response. When markets are ugly and falling, they have the potential to show risk tolerance is low based on the client’s response. These tests measure changing conditions, not some fixed internal thermostat.

The potential for mischief comes into play when the results are tied to model portfolios. A lower risk tolerance potentially gets you a portfolio with less chance for long term growth, lower exposure to fluctuating but rewarding markets, and more supposedly stable investments with smaller potential returns. So the market goes down, risk tolerance goes down, and people may sell out at low points.

Conversely, when markets go up, risk tolerance goes up, and people may buy in at high points.

The old rule is ‘buy low, sell high.’ It is my opinion that the supposedly scientific approach of risk tolerance assessment tied to model portfolios encourages people to do exactly the opposite.

It appears to be objective, almost scientific. The pie charts are impressive. But the process panders to the worst elements of untrained human nature—and actual investment outcomes may show it.

It is as if the cardiologist, upon learning that a patient dislikes sweating, prescribes sitting on the couch instead of exercise. Or if a pediatrician first assesses a child’s tolerance for icky-tasting medicine, then tailors his prescription accordingly.

We believe that people can handle the truth. Our experience says people can learn to understand and live with volatility on some fraction of their wealth in order to strive for long term returns.

So the first step in our process is to determine if a prospective client can be an effective investor. It doesn’t matter to us whether they were born with great instincts or are trainable—we provide support and education through all kinds of markets. It takes a lot of effort, but we do it because of the results it may provide.

If you need a refresher on the ‘buy low, sell high’ thing or would like to discuss how this affects your plans and planning, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.