On July 4, 1776, our founding fathers took a risk in signing their names to the Declaration of Independence. This was treason to go against the King of England! This is more risk than a lot of us would be willing to take in today’s stock market. Risk is a negative sounding word and understanding the different types of risk, through education, makes it more manageable.Is getting out of bed too much of a risk for you? Driving on I-25 to Denver? Scaling the fourteeners? Jumping out of a perfectly good airplane? We all have a tolerance for risk that we live with everyday. Risk is relative to your experience, and we thrive on it or it will give us ulcers.So how does this translate to investing? What is uncomfortable is how we make decisions concerning our goals and objectives, the risks involved in obtaining those goals and the steps we take to minimize the risks.Let’s take an example of an older couple who live off the interest of their certificates of deposit. Their dollars are insured through the Federal Deposit Insurance Corporation (FDIC), or National Credit Union Association (NCUA), if they are deposited in a member bank or credit union. Safe? At the current interest rate of under 2 percent per year, probably not. High risk? Medium risk? Low risk? You choose the correct answer, as your answer will be different from the person sitting next to you. Now for the math: $100,000 times 2 percent equals $2,000 in interest. The average rate of inflation for the last 20 years is just under 3 percent. Let’s say this couple are in the 10 percent tax bracket with no deductions: $100,000 minus 3 percent inflation equals $97,000; $2,000 interest minus 3 percent inflation equals $1,940; tax on the interest is $2,000 minus 10 percent, which equals $200. After tax and inflation, the $2,000 is actually worth $1,740 or a 1.74 percent actual rate of return, not to mention the loss in buying power on the original $100,000!Does this couple understand the risk? Probably not! The risk typically associated with gradually rising prices is known as inflationary risk. Had they locked in their CD for a longer period, they may have been locked in with an interest rate risk, too, should the rates go up.The markets ebb and flow on a daily basis. Good news, bad news or no news at all can and will affect the markets. The economy is up; the markets generally go up and vice versa. Another Enron would have a specific risk involved with it. The list of risks goes on, and it is up to you whether you are willing to take the risk.Are you a signer of the Declaration of Independence, or do you have difficulty getting out of bed? What type of risk are you willing to take with your investments?1) Ibbotson Associates 2003Donnell Services, LLC719-886-3377Registered RepresentativeSecurities America, Inc.Member NASD, SIPCFor more information, visit www.alexdonnell1.sarep.comDonnell Services, LLC and Securities America, Inc. are independent companies.
