September 23, 2020

Financial Planner Carl Richards: Beware of ‘Risk Creep’


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financialplanningBy Dan Weil From moneynews

It’s easy for investors to fall into positions that are too dangerous without even realizing it, says Carl Richards, a financial planner in Park City, Utah, and director of investor education at the BAM Alliance.

The problem is “risk creep,” he writes in The New York Times.

“We start with a plan that offers a clear margin of safety. Then, slowly, we allow ourselves to take just a bit more risk. . . . Most of the time we don’t even recognize we’re doing it.”

What’s happening?

“As things go well, our perception of risk goes down,” Richards explains. “We start to feel safe and as a result we take one small step into territory that we previously labeled out of bounds.” The process gets repeated until things blow up.

The six-year bull market in stocks offers an example of the process. “As the stock market does well, we start to believe that it will always do well,” he writes. “We start shifting more of our 401(k) money into stocks and say to ourselves, Risk? What risk?”

The solution is memory, he says. “Just remember what it was like to watch a retirement account go down by 50 percent (or more) in 2008. Or what it was like to miss a mortgage payment. Then we need to take a close look at where we are in terms of risk creep and remember: things change.”

Meanwhile, investment icon Warren Buffett, CEO of Berkshire Hathaway, offered colorful imagery to emphasize the importance of buying low and selling high in an interview last month with Quicken Loans executives.

“This imaginary person out there — Mr. Market — he’s kind of a drunken psycho,” Buffett said, according to Benzinga news service.

“Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused, you sell to him, and if he gets depressed you buy from him. There’s no moral taint attached to that.”

And how should we small fry approach investing?

“Pay no attention to headlines in the paper or people on television or anything, but put aside a little money each month,” Buffett said.

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