By David Chazin
Looking for an investment without any risk? Stop looking. You won’t find one.
Our current economic conditions may have some lab 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 lab 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 government institutions, like the lab, laid off huge chunks of their workforce.
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 lab 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.
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. Choosing an appropriate investment strategy and sticking with it – regardless of ups, or downs – may help your portfolio (LLNS 401(k), UC accounts and any other accounts) survive a volatile market.
Interest Rate Risk:
You may think that you and your fellow lab 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.
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.
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 equity-based mutual funds (whether in your LLNS 401(k), UC accounts, or in an outside account) with the potential for earning higher returns to help reduce inflation 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.
While technically not a way to invest your money, employment at the lab 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 the lab. For lab employees who chose TCP1, the effects of different risks are already being felt, as you are now being required to put contributions toward your LLNS pension.
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 roughly 150 lab employees and retirees, I’m knowledgeable about the UCRP/LLNS pension, UC’s retirement accounts, the options available with TCP2, the lab’s benefit offerings, not to mention other issues specific to lab employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my lab clients and you can ask them how working with a financial planner has helped them.
Please contact me at (925) 659-8007 with specific questions or to schedule a time to meet in either my San Ramon or Livermore office (about a mile from the lab).
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*Diversification does not ensure a profit or protect against loss in a declining market.