Crash Proof Principles: Risk Tolerance

Crash Proof Principles: Risk Tolerance

The stock market’s annual September slump is a good reflection point for investors to account for the amount of risk that’s within their portfolios, and to prepare an investment strategy to regain their losses during the final quarter of the year. To identify areas of risk, however, investors should first understand what a risk asset looks like. Any appearance of a stock, bond, or mutual fund indicates that there is a 100% chance that an investor’s portfolio is at risk—especially if the majority of their total assets are invested in these vehicles. While the vast majority of investment information from the media favors Wall Street and securities, the simple truth is that these vehicles were never intended to provide security for investors. The moral of the story is to beware of the securities industry even if the investments are “well diversified.” 

One common misconception about being diversified on the market is that bonds are safe. Brokers peddle misinformation about bonds being safe growth vehicles, while marketing them as the conservative side of investing. They do this while willfully neglecting investment strategies that actually guarantee protection of the investor’s assets, no matter the market’s condition. These advisors argue that bonds are fixed assets which do not fluctuate like the stock market and therefore they are secure. The fact of the matter is that bonds are income vehicles, and they are only as good as the institution, or government, that issued them. Bonds have defaulted in the past and with an abundance of debt issues mounting around the globe, the possibility for bonds to continue defaulting is significant. Dating back to the 2008 financial crisis, stock and bondholders in companies like General Motors lost huge sums of money when the company declared bankruptcy and failed to meet their financial obligations to shareholders. 

In the wake of the 2008 global financial crisis, interest rates were slashed and took 13 years to recover. Treasuries also struggled during this time period and fell to near historic lows following the 2020 pandemic recession. During this time, Americans were warned about volatile market conditions as company’s stock shares were significantly overvalued according to their price-to-earnings ratios. Global and domestic debt issues, flanked by inflation, and interest rate increases in 2022, scorched investors’ portfolios, and growing financial uncertainty spread fear throughout the global market, which led to a massive year-long sell off. 

Having the ability to recognize instabilities in the market can make investors more aware and improve their investment decision making in the process. Additionally, investors who address uncertainties in their investment portfolios will have a better chance of improving and protecting their financial health; this particularly pertains to investors who are in or near retirement. Morgan Stanley’s Chief Investment Officer highlighted the precariousness of a market correction and the likelihood that investors would witness a downturn before the end of 2021. Multiple experts from other reputable banks indicated the threat of a market correction as big as 20% during the final months of 2021, and based on decreasing P/E ratios, Morgan Stanley’s economists stated that the markets could already be experiencing the downturn. 

A survey from Deutsche Bank collected hundreds of responses from market experts who overwhelmingly (58% of respondents) believed that a correction up to 10% would occur before 2021 ended. Only 1 in 10 participants stated that the market would crash more than 10%. Although the market did not crash in 2021, all available data suggested that the market was due for a major downturn; yet at every turn, the media, government officials, and Wall Street denied the existence of a problem until it was too late for investors by the time 2022 began. 

Looking back at the calm before the 2022 market storm, economists believed that if over- and under-valued companies didn’t pave the way for a market crash, inflation would. From May through August of 2021, inflation all but put an end to consumer confidence in what was supposed to be a revolutionary summer that finally put the COVID pandemic to bed. Instead, heavily inflated prices at the gas pump (that progressively got worse in the summer of 2022), labor shortages, supply and demand issues, and little to no response from the federal government set the economy on a financially destructive path. Retirement Phase Expert Phil Cannella saw the writing on the wall early on in 2021, sounding the alarm for investors to reduce the risk in their portfolios before inflation completely eroded their retirement form beneath their feet.

According to a poll conducted by New York Federal Reserve Bank, the majority of those surveyed stated that they believed inflation would stay above 4% well into 2022 — they were right. Inflation nearly doubled in the summer of 2022, spiking to 9.1% before settling around 8%. Before 2022, it was almost unthinkable that the Federal Reserve would raise interest rates to combat rising inflation, because the act of doing so would cause the stock market to fall. Now, in the fall of 2022, investors are staring at historic interest rate hikes, that as of November were already up to 4%. The success of the market prior to 2022 was in large part due to an overstimulation of the economy that was quarterbacked by the Federal Reserve; today the Federal Reserve also owns the fall of the over-inflated stock market. Despite the mistakes made by the Fed, American retirees who did not heed the warning signs have faced a difficult 2022 with no timetable going forward on how they’re reaccumulate the portions of their nest eggs. 

As a result, Phil Cannella and the experts at Crash Proof Retirement have argued that investors who are in or near retirement will be caught in a catastrophic era of economic uncertainty and market volatility that they may never be able to recover from. Adding to this market anxiety is the budding debt crises that threaten to create a larger global financial crisis. There is no possible way to predict the fallout of such an event because the United States has never experienced a default on the national debt; previous warnings from Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell, however, should be a good indication that the country would be better off not finding out. 

With all of the uncertainties that come with investing for retirement it may seem like saving money is a futile exercise. With the guidance of the licensed retirement phase experts at Crash Proof Retirement, however, investors can make educated decisions about where to put their money. Retirement investing education begins with dispelling the myths that the bond market is safe and that an investor can crash-proof their retirement through diversification on the stock market — a portfolio diversified in risk-assets is not diversified at all. It is immensely important to have a retirement phase expert who can expose the truth about Wall Street investing and introduce investors to vehicles that induce retirement peace of mind. Having a proper financial education illuminates the difference between having a secure retirement and a retirement that is left at risk. Learning about the risks that are associated with the securities industry can help investors with one of the most important Crash Proof Principles—understanding risk tolerance in their investment portfolios.