On July 4, 1776, our founding fathers took a risk signing their names to the Declaration of Independence. It 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. 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 we get ulcers.So how does this translate to investing? Decisions concerning our goals and objectives and the risks involved to obtain those goals, along with the steps we take to minimize those risks, might be uncomfortable.Let us 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, correct? 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! The amount of $100,000 multiplied by 2 percent equals $2,000 in interest. The average rate of inflation for the last twenty years is just under 3 percent,* and let us say this couple is in the 10-percent tax bracket with no deductions. The amount of $100,000 minus 3 percent inflation equals $97,000; $2,000 interest minus 3 percent inflation equals $1,940; tax on the interest of $2,000 minus 10 percent 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. If they would have locked in their certificate of deposit for a longer period, they may be locked in with interest rate risk, too, if 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. If the economy is up, the markets generally go up, and vice versa. Another Enron would have a specific risk. 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?Donnell Services, LLC719-886-3377Registered RepresentativeSecurities America, Inc.Member NASD, SIPCwww.alexdonnell1.sarep.comDonnell Services, LLC, Securities America, Inc. are independent companies.*Ibbotson Associates 2003
