In this month’s edition of “Money Matters,” Scott talks about some of the best ways to manage investment risk to help your financial portfolio withstand the ups and downs of the market.

Money Matters: Managing Investment Risk Transcript

0:00:00.0 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He's taught retirement planning and wealth management strategies to hundreds of financial professionals, and he's joining us now by phone. Welcome, Scott.

0:00:22.4 Scott Oeth: Good morning, CJ.

0:00:23.7 CJ: What is our topic of the month?

0:00:26.6 SO: Well, I thought it would be a good time to talk about risk in the market and investment risk, and how you think about managed portfolio risk. It's been a very strong recovery for investors over the last year, big gains, but things don't go up forever. And I think it's important to understand that there's downside, whether it's just normal market volatility or specific companies that actually do very poorly and go down in value. So it's good to think about when things look good, that's the best time to prepare for the downturn.

0:01:01.2 CJ: Well, when is that magic time? What kind of clues should we look for?

0:01:06.7 SO: Well, I firmly believe in not trying to get too clever and time the market. It's very easy to get it wrong. It's very easy to say, "Ah, we're at a high," and be concerned about the risk and sit on the sidelines in cash and not put your money to work, and then miss a lot of wonderful gains on the upside. And conversely, it's also very easy to get caught up in all the excitement and throw your chips on the table and think it's gonna keep going up, and then there's a bad downturn around the corner. So CJ, when is the best time? I think the best time is right at the beginning when you're starting to put your money to work to start thinking about and understanding that there's a normal trade-off and it's okay, but that it's very hard to have a high long-term return investment without understanding there will be some risk, and the risk typically there is volatility, ups and downs in the market.

0:02:01.5 SO: There's other types of risk. There's the risk that most people really wanna avoid, and that's just that a company can go out of business. You're investing in it, you lose your money. No one wants to lose your money, okay? So there's some types of risk that we assume, like volatility in the market, and that we try and manage, and there's other ones that we just purely want to avoid. And so doing your homework, working with a good investment advisor, reading up on things, it can help start to pick apart these different types of risk that may be at play and be smart about how you're putting your dollars to work in the first place.

0:02:35.2 CJ: It's always been the old saw that you just put your money in and you just leave it there, and when you get ready to retire, that's when you start thinking about taking it out. And just leaving it in one place over the long term, markets are generally going up, do you still think that's a good plan if you have the time?

0:02:58.8 SO: Yeah, yeah. It's great you brought that up. There's a term called "buy and hold." Buy your investments, hold onto them. Ride them through the upturns and the downturns. And I do like that concept, and I think it works well for most people with some big caveats. I don't think that means buy one company stock or maybe a few company stocks and buy them and hold onto them forever because we can clearly look back... I saw a chart fairly recently, CJ, and it showed the top 10 stocks in 1999, and these were high flyers, they were names that everyone knew and loved and talked about, they were the big winners of the day. Well, most of those seriously underperformed at the broad-based market over the following 20 years. And if you go back further, if you go back to the original Dow Jones Industrial Index stocks, well, geez, a lot of them are not even around anymore.

0:03:52.7 SO: So if you have a narrow portfolio, I think that buy-and-hold mindset can be fairly risky, and for the base of your portfolio, the serious money, money that needs to be there for important financial goals like retirement as you mentioned or helping a child with education, important goals like that, you wanna be highly diversified. We've talked about that in the past. And if you have a broad-based portfolio that doesn't own a few company stocks, but probably owns thousands of stocks and then into bonds and maybe some real estate exposure, that type of thing. Yeah, a well-designed portfolio, one that we understand it may bend during market shocks, but it's not gonna break because the company or sector is out of business, yes, then buying and holding and sticking with it can work very well over the long term.

0:04:47.3 CJ: Getting good information from a trusted financial advisor, that's great, but what other suggestions do you have for people who like to like to do things on their own more?

0:05:00.7 SO: Yes. Right. Well, I think one important thing is we wanna be thoughtful and wary of the risk, the risk that can cause permanent loss of capital, and figure out what those are, but also understand there can be such a thing as too little risk. Some folks don't like the idea of having their money at risk and the potential for it to go away. And so if you put yourself in that camp, you view yourself as a conservative investor or conservative in your financial approach, that's fine, but you understand that there can be too little risk and you can... A kind of funny term, you can lose money safely. And how does that happen? Well, if you just sit on cash in the bank, those dollars are very safe, they're FDIC insured, they're protected. But last month, CJ, we talked about inflation, how purchasing, the cost of your living expenses can rise over time and how we may be faced with a period of high inflation right now. And so dollars that can be viewed as very, very safe, well, there's the risk that you can actually lose your purchasing power, and that's something you wanna be wary of as well. And so even for people who are of a more conservative mindset, they probably wanna take a careful look at this and figure out, "I need some money that's dedicated towards long-term wealth preservation and building so that you can keep up over time with the cost of living as it rises with inflation."

0:06:29.3 CJ: Okay. Alright. So what else, Scott? What else about risk should we know?

0:06:36.2 SO: Well, I think another really key thing is people are different, alright? There's different goals and different financial goals along a different timeline. Different people have different priorities. Like I mentioned, college education, it's always interesting to me. I could have two different client couples come into my office, sit down, we could be going through their financial plan. They could look exactly the same on paper, but they may have very, very different ideas about whether they want to help with the child or grandchild's education or not. And that's just fine, or they may have very different goals about what they wanna do in retirement or their levels of accepting risk in terms of lifestyle change. So people's financial goals are different. Their investment temperament is different. Their experience is different. So be careful if you're getting advice from Uncle Joe or Sally at the water cooler in the office. [chuckle] They may have a lot of knowledge and experience. They may have a very narrow set of knowledge and experience. They may be going on a tip that they got from someone else.

0:07:39.0 SO: And so, I really do think your money is serious. It's what helps buy your future lifestyle and either you need to put some time into it and a bit of research yourself. It doesn't have to be overly complicated, but you just wanna avoid the big mistakes and do enough research that you feel confident with that. Well, you see, many of the big financial institutions, they have a lot of good information on their blogs on their sites, and they're generally steering people in the right direction. So if you survey three, four, five of the big, large financial institutions, you're probably gonna get a pretty good idea of how to build a diversified risk management portfolio. Same thing if you go to the Financial Planning Association's website or the National Association of Personal Financial Advisors. They have some very good information there available for people on the subject.

0:08:29.2 CJ: Alright. That's awesome. We're talking with Scott Oeth, and we're talking finances. And we do that every first Wednesday of the month on North Shore Morning. Is there anything you'd like to add, Scott?

0:08:42.2 SO: Really enjoyed the conversation, CJ, and I've also enjoyed the follow-up conversations, people emailing and giving me a call, so I'm certainly open to that and happy to hear from folks.

0:08:52.1 CJ: And how do they get a hold of you?

0:08:55.1 SO: Well, my blog is scottoeth.com. Oeth is O-E-T-H, and they can email me there and pretty active on social media, so on Facebook, there's a Scott Oeth Financial Planning page, and they can always call me at the office. So they just Google Scott Oeth, CFP. It will come up there.

0:09:12.8 CJ: Alright. Thanks so much for talking with us today.

0:09:14.6 SO: Thanks, CJ.