You’ve no doubt heard of Suze Orman, the popular financial guru with her own TV show, her own syndicated column, and a slew of admiring followers.
Her advice to investors is simple: rid yourself of debt and spread out your investment portfolio among several different asset classes.
While Orman doesn’t practice what she preaches on diversification – she keeps most of her money in zero-coupon municipal bonds – she does abhor debt – and hates taking financial risks.
''Three or four years ago, I knew that with the income from my bonds, I could have $1 million to $1.5 million tax free, and I thought Okay,'' said Ms. Orman in an interview with The New York Times. ''I just wanted to know that when nobody wanted to buy my books, when nobody wanted to listen to me and everyone said bye-bye, that personally it did not matter.''
Orman wasn’t always so preoccupied with wealth preservation. In the late 1990’s, Orman, like millions of other Americans was hip deep in the US stock market. But once she began accumulating wealth – real wealth – she decided her best bet was to move the majority of her money into bonds and bond funds.
While that move could cost you, (bonds traditionally don’t provide a hedge against inflation) Ms. Orman provides a valuable lesson in keeping your money safe. In 1994, she even wrote a book about keeping your money safe, titled “''You've Earned It. Don't Lose It.'' It sold a million copies and suddenly, the concept of keeping your money safe had a global platform.
I’ll go along with Ms. Orman on the philosophy of keeping your wealth intact. After all, my fundamental rule for everybody in retirement is: don’t lose any money. Rule number two: see rule number one. I’m not saying that you should forego conserving the assets you’ve worked so hard to accumulate in your portfolio – nothing of the sort.
After all, application of principles is the absolute, cardinal, number one rule for everybody I deal with for retirement. However, too much safety might be detrimental to your portfolio. You may be saving your principal but you may not be saving the preservation of your spending power.
Consider the example of Carol, who is in her mid-seventies. She is in excellent health. She came into the office of a financial planner I know one day (who told me this story) and said that her husband unfortunately passed away a few years ago. Carol became nervous over losing some money in the stock market, so what did she do? She pulled all of her money out and stashed it in extremely safe investments, like government bonds, CDs, cash, and fixed annuities.
My friend said, “Carol, God bless you, preservation of principal is the number one rule but you are not preserving your spending power. You should know that there’s a few things that are working against you while you keep your money too safe.”
He told Carol the first thing she should consider in going the “safety” route is inflation, or more officially known by the government as the Consumer Price Index (CPI index). At the time he spoke with Carol, the CPI numbers were telling us that the current rate of inflation was a little over 4%.
It’s worth noting that there are certain elements of the CPI index that the government does not include, but are elements, like energy, medical expenses, and prescription medication. Hey, you name it.
Toss those into the mix and you get a more accurate picture of the inflation rate -- about 7.5%. So Carol, who has her money in very safe investments, is actually losing money every year because the rate of return that she earns on those safe investments is very low. Consequently, she was not staying ahead of inflation.
Carol is hardly alone. She had worked hard all her life to meet her financial goals. But she lacked one key element in her financial plan - - she didn’t plan for unexpected events, some welcome and others not so welcome. These unforeseen occurrences as well as inflation, unanticipated expenses and taxes can erode the value of your assets. And with longer life expectancies and higher costs of long-term care, securing what you've got becomes critical.
What keeping your money safe really comes down to is managing risk.
We’ve all heard the tale of the tortoise and the hare – how slow and steady beats fast and careless just about every time.
No doubt that is true on Wall Street, as well.
Don’t get me wrong. I’m not advocating not taking any risk. You have to take some chances – preferably, smart, well-researched ones – if your portfolio is going to grow at all.
The key to managing risk is to be disciplined with your investment style so that risk doesn’t rear up on its hind legs and swallow you whole. As Warren Avis, the founder of Avis Rent-A-Car once said, “As far as I’m concerned, nothing is worth going broke over.”
As I have found out in my many years as a Wall Street trader and financial writer, risk can mean different things to different people. At the high end, fooling around with risk can lead to economic disaster. That’s what happened a few years ago when investors of Enron and WorldCom, just to name a few scandal-plagued companies in recent years, found out when company officials played fast and loose with billions of dollars of shareholder money. At the smaller end of the spectrum, investors in Enron and WorldCom who parked too much company stock into their portfolios – without diversifying into broader, safer investment venues – paid a whale of a price when those stocks went into freefall.
Economists – you know, those pompous types who are never around six months after they said the market would rise 500 points when it actually sank like an anchor – define risk as the volatility or variance in return that is created by market volatility. In plain English, what they’re saying is that your stocks will, given time, move up and down. It’s the “up and down” part that really concerns those of us who want to bulletproof our investment portfolios.
In other words, lousy risk control usually leads to volatility – the up and down thing – and that can wreak havoc on your portfolios’ performance, cause you untold hours of lost sleep, and turn your usual sunny disposition dour, to the point where Jack the Ripper would give you a wide berth if he saw you walking down the street.