What You Don’t Know About Investing and Risk

In a past article we discussed the concept of asset protection being, at its core, a strategy for risk management.  In our last article, we talked about institutional risk, and there is one salient point that is worth reiterating:  In order to manage risk, you first have to identify risk.  One reason that it’s even necessary for us to point out the idea of institutional risk is that most people aren’t aware that it exists . . . even after the failure of Lehman.  Part of that is a false sense of security about things like FDIC insurance.  Sure, the FDIC raised its coverage to $250,000, but you are aware that it has 99 years to repay you if your bank fails?  What that means for us is simply that the FDIC, like so many other perceived safety nets, is nothing more than an illusion.  Well, a nice looking sticker on your bank’s door, in the case of the FDIC.

Unknown Market Risks

Here’s the reality, if you are invested in liquid markets (e.g. stocks and bonds), you are taking risk.  You can pick the fasting growing, lowest P/E company out there, but the truth is that the stock’s performance is at least somewhat tied to the overall market.  No matter how good a company’s management team is, there is very little that anyone can do about the macro-economy.  This simply means that all investments are subject to market risk on two levels: The macro level (overall domestic and now global economic conditions), and the micro level (ability to compete in a niche and generate high marginal profits that attract long-term investors).

Managing Your Own Portfolio

Many of our clients are investors, and many of them manage their own portfolios.  “Home gamers” are people who like to assess risk and allocate assets, but they are at a disadvantage in many cases, because they are often competing for returns against Wall Street professionals who are trained to do one thing: Get your money!  Remember, it’s a zero-sum-game.  For every winner, there is a loser.

Despite the fact that many do-it-yourself investors are sophisticated professionals, it’s surprising to find out how many of them are “long only” investors–how many of them don’t even know that going short (or selling assets that you don’t own in anticipation of the market falling) is even an option.  This type of knowledge is one advantage that professional money managers have over the typical individual investor.  It is a huge risk to invest when you don’t know what you don’t know.

If you’d like to learn more about investing your cash with an asset protection, risk management mindset, call Lodmell & Lodmell today.  We’ll be happy to discuss the options with you.