Baby Boomers Need to Understand Risk to Their Nest Egg

Most articles about risk are the usual ones listing each risk and what it is. Explanations don’t really make the point. What is needed is some clear examples of what risk really is and how Baby Boomers have to be very careful risk-taking with your nest egg if it is all you have to retire on, without having to sell our house, wife and kids just to live.

Everything I talk about on this blog is aimed at Baby Boomers who are about to retire or are in retirement. That’s the important thing here.

My definition of Risk is investing in something where there is a probability I may suffer a serious loss. The size of the loss is more important that the probability of one occurring though.

The Financial Industry defines risk by comparing different assets classes. For instance Bonds are less risky that Equities. But then they tell you over the long term equities tend to become less risky. There is no qualification of the potential size of any loss that might occur though.

After listing all the risk classes many writers think their job is done. But once it is defined you need to know how to manage risk by using limits and controls to carry you through.

Always ask yourself before investing in anything, “What is the worse that can happen?” and plan to limit any losses or walk away from that investment if you cannot limit your risk. This is the natural thing to do. When people invested in blue chip GM they did not expect it to fall over 80% in value to trade at 50 year lows, but it did. Had they put in a control even a 20% stop to allow for reasonable movements in the blue chip stock over the long term they may have locked in 80% of its value and not be sitting with it at only 20% of its value.

Being selective about where and when you take risks is another important point. Financial Planners are fond of saying you cannot time the market so you should invest any time you have money to invest and it will all work out in the long run 😉

You must not forget that you are a Baby Boomer in Retirement (or close to it). Capital Preservation is King and Avoiding Large Losses not Chasing High Returns, is what it is all about. So ask yourself this question.

Would you invest in the markets right now? Many financial guru’s are telling us there are some great stocks out there at fire sale prices. Would you give your financial planner $200K and say please invest it in the markets immediately. I don’t think so.

The opportunity cost of investing in risk-based assets like equities at obviously the wrong time is another consideration, despite what the financial advisers might tell you. According to your financial planner it should be no problem. So let’s wind back to January 2000 and invest in the S&P 500. By the end of 2002 your portfolio could have been down 30-40%.

In 2003 when the markets came back strongly you would have recovered some of the losses in that first year. That’s great. Note you would have been recovering losses on your capital not booking profits and adding to your capital. The opportunity cost is the 30-40% you lost and had to recover before that money could go to work for you earning money for your retirement. It took until late 2007 to get it back only for some of it to be lost again in the current bear market.

The financial guys will tell you that if you miss the start you lost out. But Rothschild said he always got into the market too late and exited too early. That means he missed the start and got out before he suffered significant losses. I’d say he was risk averse going in and panicked early so got out. Did he make money doing that? He sure did. I don’t mind trying to do the same.

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