The "Invisible" Risks of Investing

Many people only hear the negative news associated with investing in the stock market. In reality, proper investing is almost a necessity in keeping your saved dollars working toward your retirement, college savings, etc. More hazardous than trying to “time the market” by investing lump sums of dollars at a specific time are the “invisible” risks involved with investing:

Invisible Risk #1: Inflation
Inflation is the decrease in purchasing power of a dollar over time. Historically, 3 percent has been the rate of inflation. This means if you have $100 today, in 25 years it will be the equivalent of about $47. If your investments are “safe” and provide you with a 3-percent rate of return, you are still losing money because your purchasing power is decreasing. Also, you have to pay taxes on that 3 percent gain each year as well.

Since its inception, the stock market has returned an average of 11.1 percent, even with the down years of 2002 and 2003. Compare that to the rate of inflation and you can see how your money can maintain, or improve your purchasing power in the future.

Invisible Risk #2: Conservatism
It is possible to invest in the stock market and still play it too safe. Placing more than a small percentage of your money in accounts granting immediate access to cash, (high liquidity) don't offer very high returns. These accounts include money market funds, conservative mutual funds, and the like.

Younger investors, pre-50's, can have as much as 80% of their retirement assets in stocks because they have time to weather the ups and downs of the market. Even older investors should still have 50 percent of the assets in the stock market. A key to investing successfully is to know and understand your investment style and match your asset allocation to it.

Invisible Risk #3: Asset Allocation
About once a year you should rebalance your portfolio of investments. Even the perfect portfolio will become unbalanced over time as stocks split, change in value or whatever else happens to unbalance it.

Rebalancing gives you the opportunity to sell high and buy low or improve your long-term financial picture. Don't try to be a market timer, that's short term investment thinking and can lead to some big wins, and some bigger loses.

With the burden of retirement planning on the backs of individuals now more than ever, it is critical investors understand the risks, both visible AND invisible.


Brian C. Greenberg, CPA, CCPS (Certified College Planning Specialist), is the owner of Brian C. Greenberg & Associates. Mr. Greenberg specializes in innovative tax and financial services. He also hosts "College Bound", a television program that airs in the Delaware Valley and throughout Pennsylvania. He is a broker representative with HD Vest, a non-banking subsidiary of Wells Fargo. Mr. Greenberg can be reached at 856-596-7800 or brian@greenbergcpa.com.

January 2, 2007