Financial Planning: Understanding the Table Leg of Risk

‘Tis the season for fearless forecasts of where to find GROWTH in the stock market. Investor roundtables are recorded and written about, then distributed in several popular financial publications to be discussed and read all over the country.

We have one year-end recommendation that will last longer than any of those predictions.

When an investment idea lands on your own table at home, turn it upside down. A table has four legs for a reason. Balance every investment equally across all four legs:

  • 1. Risk

  • 2. Cost

  • 3. Tax

  • 4. Returns

If you keep one extra dollar in your account from any of those first three legs, is it any different than making one dollar in returns?

Too much investor focus is spent on an endless search for that next $1 of growth from somewhere else -- when the same $1 can be found right where you are sitting, from any of the other three legs.

The “Risk” Table Leg: Don’t Work Too Hard for $1 of Growth

If you lose 50% in the Stock Market, you must take more risk to find a 100% winner just to get back to break-even. If $1 turns into $0.50, it takes something that doubles in value to get back to $1.

Losing hurts more than winning helps. So, make sure you have a sell discipline.

If you have an advisor, my first question after hearing their best idea would be: “What is our sell discipline when we are wrong?”

As a professional money manager for 24 years (including two 50% Stock Market crashes), my safest prediction is that all the great ideas you hear will not be as valuable as one strict set of sell disciplines.

The magic of any discipline is that questions are answered before they are asked. There are no debates, no table-pounding reasons for a turn-around, no heels dug in, and NEVER doubling down.

The rule of holes is simple: when in one, stop digging.

Sell disciplines work on everything, not just stocks. I even have a blue jean stop-loss order. If I need a bigger size, I do not buy new jeans. I stop eating.

Why is Risk So Challenging for Investors?

Of all four legs, clearly defining risk remains the wobbliest for most investors. Even trickier for some is a sell discipline to the upside.

After one of the longest running bull markets in stock market history, how much of your overall nest egg should now be completely removed from harm’s way?

“The best time to think about losing is when you are winning.” - Casey Stengel

For our financial advisory firm, the portion of a nest egg we invest in risk-free assets is the very first number we calculate when designing a Financial Freedom Plan. Making certain that enough hard-earned savings cannot go down should be planned for before reaching for something that might go up.

We invite you to subscribe to our email newsletter (sign-up form below) to receive information on the next two legs of our series on Cost and Tax. We are here to help you on your journey to Financial Freedom!