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Investment Risk - There's No Escaping It!
By David Chazin
Our current economic conditions may have some Chevron employees on edge, worried about how their money is doing during this critical time. Over the past decade, we have seen the market rapidly go up, then back down, just as quickly, and it has hardly proved stable – even when it did, it was only for a short period of time.
In 2008, all Americans (not just Chevron employees) saw a financial crisis occur because of multiple bank and insurance company failures – a crisis requiring massive government intervention. Unemployment went through the roof and even strong, established companies like Chevron laid off huge chunks of their workforce, and many more Chevron employees went down a paygrade due to the ROM.
By May of 2012, right when we were hoping the economy was taking a turn for the better, the European financial crisis put many more people on edge and erased much of the gains we were able to make in the prior months. This caused some Chevron employees to be wary of the stock market.
But, all investments have risks — just different kinds and degrees. So it’s important to know what the specific risks are and how they can affect your portfolio.
Market Risk: Stock market ups and downs are unpredictable. So, market risk — the possibility that your money will lose value because of a decline in the securities markets — may be the risk you think about first. If you’re like most Chevron employees, a large part of your ESIP is in Chevron stock, which means you can lose or gain thousands of dollars on any given day, depending on the price of Chevron stock. Choosing an appropriate investment strategy and sticking with it – regardless of ups, or downs – may help your portfolio survive a volatile market.
Interest Rate Risk: You may think that you and your fellow Chevron employees can avoid the uncertainty of the stock market by investing in bonds, but bond investments have their own risks. Changes in interest rates affect bond prices. When rates rise, prices of existing bonds fall because older bonds are paying less interest than newly issued bonds. Holding a variety of bonds with varying maturity dates may reduce interest rate risk.
Default Risk: Bonds are also subject to another type of risk — the risk that the bond issuer won’t have the money to make principal and interest payments to bondholders. Generally, investors who buy lower rated “junk” bonds are more at risk from default than investors who hold investment grade bonds. Check an issuer’s credit rating with a bond-rating agency, such as Moody’s or Standard & Poor’s, to minimize default risk.
Inflation Risk: Over the years, the rising costs of goods and services can reduce the purchasing power of your savings. If you invest the bulk of your money in fixed income investments, you may be at risk of not earning enough to reach your long-term goals. Consider investing a portion of your money in Chevron stock and equity-based mutual funds (whether in your ESIP, or in an outside account) with the potential for earning higher returns to help reduce inflation risk.
Currency Risk: Adding international investments to your portfolio may provide diversification.* But, be aware that currency exchange rates, foreign taxation issues, and differences in auditing and financial standards, among other things, can affect the value of foreign investments.
Employment Risk: While technically not a way to invest your money, employment at Chevron is an investment of something you can never get back – your time. Your future retirement is dependent on what happens long-term with your job and/or income with Chevron, which can also affect your ESIP, CRP, and any stock options.
The bottom line is that you can’t prevent risk, but you can take steps to mitigate it. By diversifying your portfolio, you improve your chances that gains in one asset class may offset losses in another. And, when you invest for the long term, you’ll have more time to recoup any losses.
I’d be happy to sit down with you to discuss the ways in which you can protect against these risks and see which investments fit into your overall financial picture. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.
*Diversification does not ensure a profit or protect against loss in a declining market.