Investments

A Must Read New Book

Reviewed by Karin Maloney Stifler, CFP®

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WARNING:  What you are about to read will challenge your longstanding investment beliefs and practices.

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So, how are you feeling about the financial markets these days? Has the white-knuckled ride of the stock market rollercoaster exhausted your patience, if not your resources? Have extreme market declines delayed, downsized, or decimated your dreams for retirement or your children’s education? Do you question whether conventional investment wisdom really works? 

If you answered ‘yes’ to any of these questions, then pause and ask yourself if this is how you want to continue to live and manage your financial well-being. If you’ve had enough of the risky business of conventional investing, then Risk Less and Prosper: A Guide to Safer Investing is arriving just in time to unveil new wisdom to guide your investment decisions.

Co-authors Zvi Bodie, Ph.D. Professor of Finance at Boston University (author of Worry Free Investing) and Rachelle Taqqu, CFA and Principal of New Vista Capital, reveal a smart and safer way to plan for your lifetime goals.

Like Christopher Columbus discovering that the world is not flat, the authors debunk timeworn investment beliefs and practices that expose investors to more risk than ever imagined — and more risk than investors can afford to take. Here’s a sampling from the authors’ view of a brave, new investment world: 

#1 Investment Myth: Financial wellbeing is measured by total wealth. Thus, it is important to take risks in order to grow wealth.

New Investment Truth: Financial wellbeing is measured by the ability to create reliable income to sustain your fundamental standard of living, especially during tough economic times. 

Start the investment decision-making process by defining your goals and the relative importance of each goal. Then craft a safety-first strategy that achieves your basic lifetime needs with as little risk as possible. This strategy matches assets and income with goals, rather than investing assets for the promise of more growth. The benefit of investing safely is to avoid catastrophes and protect your ability to afford your most important goals. The tradeoff is potentially lower investment returns — even negative — inflation-adjusted rate of return, but is as valuable as buying insurance that protects your home in the event of a fire.  

#2 Investment Myth: The longer your time horizon, the more risk you can afford to take. 

New Investment Truth: Your tolerance for risk of losses is determined by many factors, but least of all, your time horizon (meaning how long until you need the money).

The primary drivers of how much to risk includes the relative importance of your goals, the risk and flexibility of your career and income, and your ability to adapt to adverse circumstances. In truth, it’s common for your tolerance for risk to vary for each goal based on how essential and valued they are to you, and to vary based on what’s happening in your life or the world around you. Basically, the more secure your income and career, and the less important the goals, the more able you are to adapt to market risks. Conversely, you may be less able to recover from investment losses if your career and income have stalled and you’re unable or unwilling to reduce the goal — at any age.   

#3 Investment Myth: Stocks aren’t risky in the long run.

New Investment Truth: Stocks are risky over any time horizon — short or long.

“Arguments to the contrary are junk science,” proclaims Professor Bodie. There is a wide range of possible outcomes when investing in stocks over any time period, as we have witnessed from the two stock market collapses in the past seven years. Investors and even the “experts” often underestimate the risk of things going badly. The less able you are to adapt to a worst case outcome (i.e. by working longer and saving more), the less stocks make sense in your strategy, no matter your time horizon.  

Risk Less and Prosper: A Guide to Safer Investing is due on bookshelves by year-end, and is available to pre-order now. Authors Bodie and Taqqu will show you so much more about the brave new investment world in which you can enjoy your life with less financial risk and drama.