The word risk is often misused when it comes to investing.
Most people think of risk as simply the potential of losing the capital they invested. This lack of knowledge can be – and is – absolutely devastating to the portfolios of many people around the globe. As a result of a simple lack of education, most people solely worry about capital preservation, completely missing the bigger picture.
Do yourself a favor, folks: Forget what you think you know.
All investors should replace their often-crippling capital-preservation fear with loss of purchasing-power fear. Since 1970, the cost of living has gone up in this country about 5 percent per year. In some areas of the country, the cost of living has almost risen a staggering 10 percent! Most people who have a fear of capital loss invest only in short-term bonds and money market accounts. Such an approach is investing will guarantee you a 4 to 5 percent purchasing-power loss per year.
You don’t need to possess a degree in economics to know that is a losing proposition. Compounding such a loss over a five to ten-year period will result in a drastic loss of purchasing power. So, you need to constantly ask yourself, Am I being too timid? and then act accordingly.
The solution to such a situation is financial education – and investment education. The best portfolio for anybody, regardless of age, is one with growth and income. By having a balanced approach, historically, you can offset the negative impact of those rising prices I spoke about earlier.
Let’s be realistic: The cost of living is always going to go higher, and that’s why it is vital that your level of education goes up as well.
Ed Butowsky is the managing partner of Chapwood Investment Management and is an internationally recognized expert in the investment wealth management industry. Ed is also a frequent guest on other networks such as CNN, NBC, ABC, Fox News, Fox Business, and Bloomberg to name a few.
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