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How Long Will My Money Last and What Are My Risks?

How long will my money last and what are my risks?
These are tough questions. Risk is a part of investing, even if you only buy CDs (certificates of deposit). Regardless of what kinds of investments you choose, there’s always some kind of risk involved, and you need to be aware of what you own and be comfortable with your investment decisions.

When it comes to investing, the question isn’t whether to take risks. Risk can’t be avoided. That’s why you need to decide what risks you are comfortable taking, and how you can manage them. Every portfolio has many types of risks associated with it. The difference is the amount of each.

What are the risks in my portfolio?

Inflation Risk
Maybe you prefer putting your money into a bank savings account or CD because it feels safe. Believe it or not, both of these strategies carry some degree of risk. There’s a good chance your money may not be able to keep up with inflation. That means your dollar may be worth less in future years and not buy as much.

Principal Risk
The money you invest is called your “principal.” Unfortunately, you don’t always make money on what you’ve invested. In fact, you can even lose some or all of your principal. The chance that you may lose money is principal risk. This risk is commonly found with investments in stocks but can affect other types of investments as well.

Interest-Rate Risk
There is a risk that your investments will fluctuate because of changes in interest rates. Different investments can react differently to the same events. Diversifying your investments by investing in many different types of assets can help reduce the volatility, or the swings, in your overall portfolio’s value.

Market Risk
Investments are vulnerable to changes in the economy and to general changes in the markets they trade in. Although stocks and bonds issued by companies are tied to profits and losses of those companies, there are many factors outside of the companies’ control that may cause a rise or fall in prices.

Credit Risk
Think credit cards. When you borrow money you have to make payments plus interest to pay off your debt. The same holds true for companies that issue bonds. There’s a chance they won’t be able to make interest payments or return all of your principal. That’s credit risk.

Liquidity Risk
Let’s say you needed to buy a car or home, and you had to have the money tomorrow. If you couldn’t sell or redeem an investment quickly at a fair price to get the cash, it’s an indication that your investment has low liquidity and a lack of liquidity can affect its price.

Volatility Risk
This risk encompasses all the other types of risk. The size and frequency of fluctuations in an investment’s price determines its volatility.

Longevity Risk
You yourself have a risk: “Longevity Risk.” Longevity risk is the risk of living too long. Modern medicine has helped people live longer, which is great news. However, this is a two edged sword. Longer life means assets must now last for many years after retirement—possibly for 20-30 years longer at current life expectancies—and at a time when most income is fixed yet inflation continues to push up expenses. So growth is still needed, even in the retirement years.

What kind of investor are you?
Are you less concerned by the peaks and valleys of investing? Or do you prefer as steady an investing experience as possible?

The reward for holding on to your investments through both up and down markets is that your investments may grow in value. But you have to be willing to hold on through the long term in hopes of reaching your goals. If you use less volatile investments, your investments will probably fluctuate less, but may not reward you as much in the long run or keep up with inflation.

So how do I get the right balance?
Evaluate your portfolio often. Do you really understand what risks are in your current portfolio? How has it changed since you bought it? Every investment holds some level of risk and most portfolios have several risks (For example: Most every portfolio has both inflation risk and longevity risk).

Only you know how much risk you’re comfortable with. Risk and Reward work hand in hand. What’s important is that you find the right balance of risk and reward to help you meet your long-term goals, regardless of what happens in the short term. Your risk tolerance depends on several factors, including:

Know your investments and evaluate often
Before you know where you are headed, you need to have a plan. Hot tips don’t work. Good planning does. Figure out your goals. Evaluate your assets. Determine their risks or get help doing this. Although you may have looked at everything last year (or some years ago), times change, goals change, interest rates change and your needs change. As the old Chinese saying goes: “May you live in interesting times.” These “interesting times” affects more than just politics and the economy, they affect your income and your future. So take control of your portfolio, and your future. The question still is: What are YOUR risks?

Securities offered through Independent Financial Group, LLC (IFG), Member FINRA and SIPC 1-858-436-3180. Office of Supervisory Jurisdiction Branch; 1755 Park St.; Suite 200, Naperville, IL 60563, AAS, Ltd. and IFG are independently owned and operated. Carol Christian is securities licensed in Indiana and Illinois. J. Michael Reindl is securities licensed in Indiana, Ohio, Michigan, Texas, Florida, North Carolina and Washington.

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