Click below to listen to Episode 87 – Understanding Investment Risk

Understanding Investment Risk

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How much are you willing to risk when it comes to investing?

Life is full of risk. Everytime we get into a car, move to a different city, get on a plane, or start a new job, there is a RISK, and the list goes on and on. What if the human race decided to never take any risks? Risk is not a bad thing because a life completely void of risk would be very boring.

In this episode, Bob and Bailey discuss 15 types of investment risks, because when you know what the risks are, you can make better educated decisions. These 15 risks include:

  1. Concentration Risk
  2. Economic Risk
  3. Political Risk
  4. Tax Risk
  5. Liquidity Risk
  6. Interest Rate Risk
  7. Inflation Risk
  8. Longevity Risk
  9. Emotional Risk
  10. Expense Risk
  11. Short Term Risk
  12. Long Term Risk
  13. Health Risk
  14. Overall Market Risk
  15. Not Taking Risk

HOSTED BY: Bob Barber, CWS®, CKA®
CO-HOST: Bailey Theaker

Mentioned In This Episode

Christian Financial Advisors
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Bob Barber, CWS®, CKA®
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Bailey Theaker
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EPISODE TRANSCRIPT

[INTRODUCTION]

Welcome to “Christian Financial Perspectives”, where you’re invited to gain insight, wisdom and knowledge about how Christians integrate their faith, life and finances with a Biblical Worldview. Here’s your host Christian Investment Advisor, Financial Planner, and Coach, Bob Barber.

Bob:
2 Timothy 1:7, “For God did not give us a spirit of fear, but of power and love and self control.” Today, we’re going to cover investment risk, but first we’re going to cover just risk because life is full of risk. When I got in my car this morning and came to work, I was taking a risk, but I put my seatbelt on. That was a calculated risk. I stayed the speed limit. I wasn’t reckless. Everywhere we go, there’s risk. Changing a job or a better one, there’s a risk in that. Getting on a plane or boat, there’s risk, starting a business, and the list goes on and on. But we as humans, we need to take risk because think about what the human race would be if we never took any risk. Hello, Bailey. We are tackling a hard subject today, and we prayed about this. And I was thinking, man, do I bring this to the podcast? And I thought, yes, I am. Because I’m just wanting to be transparent. I have fears in risk, and our listeners – everyone has fears in risk.

Bailey:
And even doing this podcast is a risk, even talking about this subject.

Bob:
Today’s subject is a risk and doing a podcast like that.

Bailey:
Yeah. But how boring would our lives be if we didn’t ever take any risks? Right. I mean, life is, that’s all life is. Every decision we make, every move we make, is risky. And I love this John F. Kennedy quote that says, “There are costs and risks to a program of action, but they are far less than the long range risk and costs of comfortable inaction.” I just love that. The idea that that it is risky to not take any risk, like never having to risk. I know a conflict that I’ve run into in my life at this stage of life is the world is a crazy place right now. There’s so much going on. There’s so much instability. And what about having kids or going outside or living life at all? All of it seems really risky.

Bob:
Oh, with COVID, with the Coronavirus.

Bailey:
Absolutely.

Bob:
Yeah. I don’t want to go out because I’m scared I’ll get it, and you can take calculated risks when you do that. Wear a mask. Keep your hands clean. Don’t talk to someone five inches away from them. You know that you’re taking the risk when you go out, but you’re also taking a risk if you don’t go out.

Bailey:
Right.

Bob:
I mean, depression is very high today. And the riots in the streets could just be caused by just pushing people down so much and saying, you’ve got to stay in this box and you can’t move outside of this little 10 foot by 10 foot shell. And it makes you crazy. There’s a risk in that.

Bailey:
And I think life is a bit weighing risks. You’re saying which risk am I willing to take? Which one is more important? Which one brings more meaning to my life? But the risk of staying home cause I’m afraid to go outside. That’s a risk that has a million consequences for it, but going outside has consequences too.

Bob:
I want grandkids. I got one, and I want a lot more. And you know what I hear, like you said, it’s a crazy world. Why would I want to have more kids? What if every single person in the world today said, I don’t want to risk having more children because of the crazy world we’re in. What would happen to mankind?

Bailey:
I mean, it would cease to exist. It wouldn’t exist at all.

Bob:
Just a couple of generations.

Bailey:
What a crazy thing. And even, I mean, if you think about our country and what a risk it was to come to America, right?

Bob:
They came in such small ships. Have you ever seen how small those ships were?

Bailey:
Oh, it’s insane.

Bob:
Yeah, but I’ve been to the Northeast and the historical places, and the ships were small.

Bailey:
That was a long way to go, too.

Bob:
Huge risk. Yeah. You’re going out in this ocean, just like you’re this little dot in the ocean and there’s no radar. You don’t know what the weather is bringing. That was a risk. Our ancestors, they risked everything by getting on that boat and crossing the ocean to come to the greatest country in the world.

Bailey:
Absolutely. Because all action has risks, but so does inaction.

Bob:
I think about our inventors and all the things that they risked from electricity to the telephone to the automobile, to the technology we use today. It all involved risk. And what if they were just so fearful? “I’m not going to take that risk.” And they just stayed in their comfort zones. What would life be like today? We wouldn’t even be recording this podcast because it’s electronic. And so, there’s calculated risk. And what we want to talk about today, we are going to get to the 15 different types of investment risk. And because this is a financial show, but before we get to that, we have to kind of tackle the risk. And risk, as I was mentioning earlier, kind of goes hand in hand with fear – fear and risk – and fear is not a bad thing. I am fearful, too. We had a leak in our roof, and I’m fearful to get up on that roof and that’s wisdom. I was thinking, and we paid somebody like a thousand dollars to come fix that. But paying a thousand is a lot cheaper than me falling off the roof and going into the emergency room and all the pain and the $5,000 bill I would have. So, that’s wisdom. And I’m glad that I don’t want to take that risk to get on the roof. Because like I say, that’s wisdom. So, calculated risk, I believe in calculated risk. I think that what we’re going to share today is calculated risk. If you know all the different types of investment risks, you can take a calculated risk, and I’ve taken calculated risks for many, many years and it’s paid off.

Bailey:
Absolutely. So what do you think it is that stops people from taking those calculated risks?

Bob:
I think it’s it’s a fear. It’s a lack of knowledge that just stifles you. They just don’t know what to do. But I think it really comes down, a lot, to fear and lack of knowledge. What do you think?

Bailey:
Yeah, I agree. I think that it’s fear. But there’s a healthy fear. I think that you learn that if you touch a hot pan on a stove, you learn, Hey, that burns. I don’t want to do that again. And so there’s something that keeps you from making that decision again, or fearing the Lord is a good thing. The scripture says that the beginning of knowledge starts at fear of the Lord. And so having a healthy understanding of risk and of what could go wrong, like you said, it’s a calculated risk, but I think not knowing what those things are, it just makes people totally freeze.

Bob:
I think about the risk of the servants and the parable of the talents and their master. He gave one of them 1, and the other one 3, and the other one 5. And it was interesting that the one that had the least to lose was scared to take the risk. And in my years and years of being a financial advisor and investment advisor, I’m amazed that it’s the wealthiest clients I have that will take the most risk. I don’t know why it is that way, but I know somebody who’s listening to this might be thinking, well, they have so much, they can gamble. Look at the scriptural example. In the scriptural example, he took his 5 talents and invested all 5 or the 3 and invested all 3, but we don’t want to take scripture out of context, too. So, we want to go back over to Ecclesiastes that says, “Give your portions to seven or eight because you do not know what disaster may come upon the land.” That was Solomon that said that. So, that’s going to be 1 of our 15 investment risks.

Bailey:
Hmm. So good. And in Philippians, it says, “Do not be anxious about anything, but in everything by prayer and supplication with Thanksgiving, let your request be made known to God, and the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus.” I love that because it’s almost saying the opposite of that fear is trust and to put your trust in something. That’s what changes the game. And so, let’s get into those 15 types of investment risks. What do those look like, Bob? What does it look like to be educated in our risks and to make some calculated risks?

Bob:
Well, risk number 1 is what I call concentration risk. And this is where you’re investing in only one category of all the different types of investments. As an example, you’re investing all in real estate, which is where most realtors think you should invest. I suppose that’s because of what they do, but you invest it all in real estate, or you invested all in stocks or you invest it all in bonds or all in CDs or all in gold or just one sector of the economy when it comes to investing. And maybe just energy or just industrial or just utilities. That’s called a concentration risk. And you have to be very careful of concentrating all of your wealth into one basket. Again, that goes back to Ecclesiastes 11:2, “Give your portions to eight, yes to seven, because you do not know what disaster may come upon one of these.” Real estate has been hot so long here in the Austin, San Antonio area, where we are right in between those two towns. It’s been so hot for so long that there’s this mentality around here that no matter what you invest in in real estate and no matter what the price is, just pay it because somebody else is going to come along and pay a higher price. At one point, that’s going to stop. And as we’re starting to approach California prices in certain areas in like downtown Austin are now here in downtown New Braunfels, they’re asking $400 to $425, $450 a square foot. Several years ago, it was $100 a square foot. Before that it was, I remember when it was $60, but it just continues to go up, up, and up. So that’s an example of concentration risk and being extremely careful of the risk of getting caught up into is never going to end. There’s a certain point that you can blow the air into the balloon before it pops. And the balloon needs to be, it needs to come back. And I’m not saying that all real estate is bad, but don’t put all your eggs there. It’s the same with stocks and a sector. In a certain sector, if everyone’s going to that sector, that sector could get overvalued. And you need to look at that and pull back from that. So be careful of concentration risk. That’s risk number one.

Bailey:
That’s something that I’ve never even thought about before. And so, like you said, I think what drives people’s fear is that they’re not educated on what the risks could be. And so it just causes us to freeze, right? And so the first risk, concentration risk, is one that I haven’t even thought about.

Bob:
And most people don’t think about it if they have all their money in CDs. They are not thinking about concentration risks, but having all that money in CDs is a concentration risk because with CDs, they’re not even keeping rate with inflation. So you’re going broke safely.

Bailey:
Wow. Okay. So, risk Number 2 would be economic risk. What does that look like?

Bob:
That’s about investing in investments that are only going to do well when that part of the economy is doing well. So there is economic risk in investing. You have to know where that is and underweight or overweight to that particular sector where the economy is. And one of the things is, is that as a certain part of the economy gets overheated, when that starts happening, nobody’s thinking about getting out of that part of the economy because everyone wants to go where everyone’s going. It’s that follow the herd mentality. So as you’re looking at that, look at that from an economic standpoint and pull back on things that have been doing well for so long that it’s time for it to take a breather, kind of like what we just spoke of under that concentration risk.

Bailey:
Wow. And then number 3 is political risk. What is the political risk?

Bob:
Political risk has to do with where we are politically, who we put as our leaders, and are our leaders free enterprise driven or are they socialistic driven? Because that’s a major risk that if they want to stifle free enterprise, imagine what that can do to the economy over the long term? So there is political risk. Look at who is being elected and which side do they bend to – the wrong side or the right side.

Bailey:
And you’ve talked a lot about investing one way and voting a different way. And I think that’s really interesting that you can vote for someone who isn’t going to line up with the way that you’re investing your money or the way that you’re taking risks.

Bob:
I see it all the time. And I see it even with Christians in the form of they want to be diversified. So, they’ll have half their investments with us that are biblically responsible and the other half supporting the left, and I don’t get it. So yeah, you gotta be careful about dividing against yourself because a kingdom divided cannot stand.

Bailey:
Amen. Amen. Okay. Number 4 is tax risk.

Bob:
Oh, taxes can really eat into your returns. I’m dealing with this right now from some property that we sold. It has enormous capital gain in it. And I can either 1031 exchange that piece of real estate into another piece of real estate or pay the tax on it. And I’m going back and forth. And I’m in that point right now, there’s a 45 day period where I have to identify a property. If I don’t, then I’ll have to pay all the tax. And that tax can be enormous for the amount that we sold the property for. So, that’s tax risk. Other risk would be being careful of moving a portfolio around too much and buying and selling too much, creating short term gains that are taxed at income tax rates versus long-term capital gain tax rates, and using the tax deferral as much as you possibly can. But also, you’ve got to look at it from the perspective of are taxes going to be higher in the future than they are today? And most people believe that they will be higher in the future. So, this all plays into how you’re investing in that tax risk.

Bailey:
Wow, what’s number 5. What’s our fifth investment risk?

Bob:
Liquidity risk, and how liquid is the investment? So back when we were talking about real estate, real estate is not a liquid investment unless you’re investing in a publicly traded real estate investment trust, but you own a home or you own some land. You have to put that up for sale, and in a hot market like we live in, they may sell in five days, and that’s what’s happening around here. But in other parts of the country, that’s not the case. So, you have a liquidity risk. Each time you do an investment, you have to look at that liquidity risk and what will it cost you to get rid of that quickly? I have a lot of people, they’re always calling and saying, Hey, well, let’s invest in some gold. Gold, there’s liquidity risk. You’re not going to take gold coins and go down to the local grocery store and liquidate them. So, you also have the cost of commissions in that, because many of those that buy and sell gold, there’s a high markup on the gold, or they’ll give you less than it’s worth because they have to make the profit.

Bailey:
And other tax penalties that come along with that?

Bob:
With gold and silver. Yeah, there is. There sure is. And the taxes are not the same as they would be on other investments that you would hold long-term. Income tax.

Bailey:
And number 6 would be interest rate risk. What does that look like?

Bob:
That depends on where the interest rates are and how the interest rates are going to affect sectors. As an example, right now where bonds are, if you want to buy long-term bonds if interest rates start going up, the bond value will drop. It’s called bond duration. So if you’re buying a 15 year bond, as an example, can you see interest rates going down anymore? They’re at rock bottom. We’re at the lowest point we’ve been in years and years and years. So when these rates start to go back up, as an example, with interest rate risk, if you have a 15 year bond and interest rates were to go up by just 1%, the value of those bonds would drop by 15%. That’s called bond duration. Also, the interest rate risk is in real estate. If interest rates start to go up, real estate doesn’t sell as easy, and the price of real estate will have to go down to compensate for people that are buying real estate at a higher rate, because they’re not going to be able to afford as much house as they can at a lower rate. So, that will affect the housing market. That will affect the overall real estate market. Interest rate risk also affects companies because a lot of companies, they borrow money. The money is a floating rate. If the rate goes up, the company can’t make as much profit. There’s a lot of risk there.

Bailey:
So we’re not even halfway through our 15 risks.

Bob:
We’re at number 6, right?

Bailey:
We’re at number 6. And I don’t know about our listeners. I know I’m a rookie investor. And so, this all just feels like, like new information to me. And I think it’s a big point of why having an advisor is really important because these are things that I wouldn’t think about just going straight into investing on my own.

Bob:
No, you wouldn’t. And I think about all of this just from experience. By the way, I came up with this list in about 15 minutes. It wasn’t hard because I look at these risks on a daily basis, but people don’t know what risks to look at when they’re investing if they’re not real experienced in it. Because of that, what happens is, is fear sets in, and I’m not going to make that investment because I don’t know what the risks are in that investment. But if you have a real experienced advisor that knows all the risks going in and knows how to compensate for that risk. As an example, we were just talking about investment risk. I’m not going to go out and buy long-term bonds today. I’m staying in all very short-term money, short-Term bonds, because if interest rates go up, those bonds are not going to be affected nearly like a 15 year bond. I’m looking at three month bonds – three month, six month bonds, bonds that are very close to maturity for that very reason of the interest rate risk. And that’s why I’m very cautious about real estate right now. Very cautious. Rates start going back up, prices are going to have to come down to compensate.

Bailey:
And that’s so helpful. I mean, even just thinking back to that passage of scripture that we read with, don’t be anxious about anything, but instead in everything, go to God in prayer. There’s something so comforting in knowing that somebody like an advisor, who’s walked this road before you, that you can say, Oh, I’m not alone. I’m not just walking into a dark tunnel. There’s somebody that can kind of walk me through it in the same way that we can put our faith in God and say, oh, he’s been there. I’m not going into this by myself completely blind.

Bob:
That’s right.

Bailey:
Okay. So number 7 would be inflation risk. What is that?

Bob:
Inflation risk is where it gets ahead, and that’s the example of a CD. Rates are so low in CDs. If your CD is paying 1% or 2% in today’s overall inflation, and I know exactly where it is because we use e-money with our online financial planning system. It keeps up with where interest rates are. 2.8% is right where inflation rate is. Okay. So the inflation rate is right at 2.8%. If you’re making less than 2.8% on your investment, you’re losing money. You’re losing the value of your money. So you think about that. If you’re making 2% in a CD, you’re losing 0.8% of purchasing power every single year, but CDs are one of the safest places to put your investment dollars, but don’t put them all there. That’s money for when you’re going to need something in an emergency and be careful of going long-term, especially today, because long-term rates are so low, but that inflation risk is really there because the value of your dollar of your investment is actually going down if inflation is higher than what it’s making.

Bailey:
And number 8 is longevity risk.

Bob:
Longevity risk is is a big one with retirees. And this is why when we do financial planning, we have to figure in how long are they going to live? What is the rate of return? What are their living expenses? And will they be able to live on what they need for their lifetime? I say what they need. Hopefully, they have enough to live on what they need. Will they be able to live on what they want? Let me say it that way, okay. Because you may want to live and retire on $200,000 a year, but what you can retire on is $80,000 a year or $50,000 a year. So, there’s longevity risk. That’s not a bad thing. We all want to live long, but you could outlive your savings if you’re retired and you don’t compensate for your expenses and your rate of return. You’ve got to know what your rate of returns are. So, as an example, if you had all your money just sitting in CDs and you’re losing money slowly, but every single year, everything’s getting a little bit more expensive, right? Because it’s 2.8%. Inflation in some places is even higher than that. If you look around here in places, it’s much higher in the Central Texas region because of how we’re growing so fast.

Bailey:
Wow. And number 9 would be emotional risk.

Bob:
We’ve made an entire podcast on this and emotional risk has to do with allowing your emotions to get in the way of making sound, long-term investment decisions. And that’s when the markets – like when they drop dramatically – and you see your portfolio drop dramatically with the markets. That’s called volatility. But so many times, people associate volatility and account value with loss. As an example, we have a $500,000 portfolio, and it’s a growth portfolio. And back in March, when COVID knocked the market’s down 20-25%, that $500,000 portfolio they could see a statement the next month of where it dropped by 20%. That’s $100,000 on that portfolio. So, it drops down to a hundred. You’ll have this conversation, they’ll say, hey, we’ve lost $100,000. You’ve had volatility. It’s moving up and down. But if you have a well-diversified portfolio and that’s letting your emotions get caught in that, because emotions would say, I’m selling out right now.

Bob:
Now you’ve declared a real loss. You’ve made the loss real if you sell while you’re down. Now, this is why I always believe be careful of concentration risk, that very first one that we talked about. Stay away from concentration. If you stay away from concentration and you have a well-diversified portfolio, historically, it’s always rebounding. Now, I have to make the statement here for compliance reasons that past performance is no guarantee of future performance. I can’t make the statement that it’s always going to rebound. I can make a statement based on history that it always has in the past – a well-diversified portfolio. I can make a statement that in a concentrated portfolio like I saw back in 2000, I saw people that invested all in technology during the internet bubble. It went down, and many of those companies went broke. It was not coming back, no matter how long you held on, the companies ceased to exist, but that’s the emotional risk.

Bob:
Be careful of allowing that emotional risk, and emotional risk also always wants to get in when everything’s going great. I noticed that if the stock market has been fantastic for five years in a row, everybody wants to get into the stock market. And then we have a downturn, which is normal. We have downturns and then nobody wants to get in anymore. So, they want to get in after everybody else has already gotten in. And then, they want to get out when the market drops, when that’s the time you should be getting in. That’s your emotion.

Bailey:
And that could be said for, for all of life, too, I suppose. Everybody loves sailing on smooth seas, huh? All right. Risk number 10 is expense risk.

Bob:
This has to do with how much does the investment cost. I was just having a conversation this morning with an individual. They put all of their money, 100% of their money, in an annuity. And because of the high fees and expenses of that annuity, it’s eating into the return. So, we’re looking at that and how’s that going to affect this person over the longterm? And this was an annuity that didn’t even have any guarantees with it. That’s what I mean by high fees and expenses. I mean, if you’re making a gross 10% return and your fees and expenses, like in some of these annuities could be 2% or 3%, you’re giving up 20% of your return or 30% of your return to expenses, where you can now move into investments where the expenses are 1% or less or half a percent or less. So you keep more of the return. I mean, if you’re making 10%, but you see 7%, you’ve given up a lot of return, but if you’re making 10% and you see 9.7%, you’re keeping a lot more of your return. That’s what I mean by expense risk. So now we’ve gone through 10 of them. We’re down to the last third of the risks.

Bailey:
Yeah. So our next two are short-term and long-term risk. So, what does short-term risk look like?

Bob:
Short-Term risk are allowing short-term thinking to get in the way of long-term results. So if you have a well-diversified portfolio and you can see historically how that portfolio has done, but you have those short-term fluctuations. That’s what I mean by that. The next one, the long-term risk, though, is an unwillingness to change a mapped out plan when newer roads are ahead. Right now, there’s a newer road ahead. And that is how we are moving more and more to electric vehicles, as an example. Now I’m not saying that oil and gas is dead by any means. I mean, we’re still going to be using oil and gas in this country for a good 15, 20, maybe 25 years. We need our natural gas plants that make the electricity that the cars are gonna run on, but you need to be willing to change with the times and not just say, “I’ve got this plan and I’m just going to stick to it no matter what.” Well, what if things are changing? So that’s what I mean by the longterm risk.

Bailey:
Okay. Number 13 is health risk.

Bob:
Well, we’ve seen that this year, haven’t we? There’s health risk individually, but then there’s also health risk like the pandemic that we’ve had and how that’s going to affect the economy. There has been a lot of money made, though, this year, even while the economy shrunk, because there were sectors that took off and did well. And the big box stores did very, very well. We’ve seen a whole new sector of delivery people now. Now, everything is being bought to us, but there’s health risk that can affect the economy. I wouldn’t have put this in there normally, well I would have, but it would just be our own health, but this year it’s been the whole globe.

Bailey:
And like you said before, things have changed. The world looks different than it did a year ago. And so that longevity risk comes in here, too.

Bob:
So we just got two more risks now.

Bailey:
All right. Number 14 is overall market risk.

Bob:
This is a lot of what I’ve referred to earlier that the trends and sectors are going to rotate every few years. As some sectors become overvalued and others become undervalued, you need to see the risk in that and make the changes to your portfolio as they come about. And then our last risk is not taking any risk at all. I mean, that can be risky as well because of what not taking risk can do to you. Does that make sense?

Bailey:
Yeah. It’s similar to that quote that we mentioned earlier that comfortable inaction is a risk all in itself.

Bob:
Yes. That’s correct. That’s the 15 investment risks that I see. And if someone wants to go to our podcast website, they can see all this. It’s all laid out for them there, and these are all the risks that you need to look at if you’re going to manage your own portfolio, or you can hire an experienced advisor that knows how to put together a portfolio compensating for these risks,

Bailey:
That’s so helpful in being able to make educated, calculated risks because they’re necessary in all of life. And so, how do you understand your personal investment risk tolerance?

Bob:
We use a computer program that’s called Riskalyze. I want you to think of risk as a scale from 1 to 100. And 1 is the least amount of risk. That’s like putting money, I guess, under your pillow and you’re sleeping on it. And then think of 100 as investing in one stock in one sector and putting everything there. That would be the highest risk. So, risk runs from a scale from 1 to 100. 1 is basically zero risk. 100 is the most aggressive. And then there’s everything in between there. Also, think of risk like a speed limit and getting to a destination. We all have a choice. For example, every year – we’ve been doing it for about 30 years – we either fly or we drive, but we like to drive many times all the way to Colorado from Central Texas. That’s a thousand mile trip. I can choose to drive 30 miles an hour, or I can choose to drive 65 or 70 miles an hour, which is the speed limit, 75 in some places. And so I choose that calculated risk and think about where you choose along the spectrum between 1 and 100. Do you want to be going 30 miles an hour? Do you want to be going 50? Or do you want to be going to 80? Do you know where most people fall? Most people fall in that mid range. They’re comfortable with that 45, 55, 60 on a risk scale. But then sometimes, people will surprise me, even my retirees will surprise me. I had one yesterday, they’re in their eighties, and they have plenty from their pension plans and they had this large portfolio and they came in at a risk measurement of like 91. I’m like, what? So that was because that was money they wanted to give to their grandkids 10 or 15 years from now.

Bailey:
So does all risk equal some kind of reward?

Bob:
Normally it does, but not always. I mean, the more risk you take doesn’t necessarily mean you’re going to get reward if it’s not calculated. So you must calculate it. And there’s no guarantees in life. I’ll just say it right now. There are no guarantees. We don’t know if we’re going to make it home safe today. None of us do, but we’re going to get in that car and we’re going to go back home. We’re going to get in the car and come back to work. We’re going to take vacations. We’re going to do things in life. So, there’s risk, but there’s no guarantee. So with that, when you look at all 15 of these and you put these into a portfolio and compensating for everyone, there’s still no guarantee, but at least it’s calculated. The longterm results have been much, much better than uncalculated risk. So, what is your risk number? Do you know what your risk number is?

Bailey:
I have no idea.

Bob:
Well, you need to take your risk number. We need to know your risk around here. I know what mine is. And my risk number is actually pretty high, but you know why it’s high? It’s because I know how to calculate it. Okay. And we have five different values based portfolios that can correspond to where you fall on the risk scale.

Bailey:
And the first of those would be an ultra conservative. What would an ultra conservative look like?

Bob:
Well, an ultra conservative portfolio is one that has no stocks in it at all. It’s kind of a CD alternative. We’re investing in treasury bills and US treasuries and some real short-term bonds. So, on a scale from 1 to 100, that’s going to fall at about a 20 when you look at that on our risk program.

Bailey:
And the next would be conservative.

Bob:
Conservative is where you add a little bit of equities to it. That’s going to be a risk scale of about 25 to 27. It’s going to boost those returns a little bit over the longterm, but it’s also going to give that portfolio a little bit more volatility.

Bailey:
Okay. And what about moderate?

Bob:
Moderate’s where most people, like I say, lie. Not everyone, but most, and that’s going to fall in that, that 45 to 55 range category on the risk scale, depending on where the markets are and the sectors are. That will have as much as a 60% exposure to equities and stocks, or as low as a 40 or 30, even 35% exposure, but it has to do with where the economy is and where the different sectors are, and are they getting overheated or not? That’s what we do here at Christian Financial Advisors is we move back and forth depending on where the risk is and where I feel it is and applying again all those risk strategies.

Bailey:
And the next would be growth. Where does that fall on the risk scale?

Bob:
Growth is getting up there. That’s getting up there on the risk scale of 70, 75. It’s really a longer term portfolio in a normal market. That will be as much as 80% invested in equities, 20% in the bond side, short-term treasuries and short term money to give it a little bit of stability. But like I say, that is a portfolio that’s going to be much more volatile, and you need to understand the risk associated with that. And that’s where on our risk scale, we’ll show you what to expect in volatility, how much down you should expect that to go, or how much up over time.

Bailey:
And then the last kind would be an aggressive growth portfolio.

Bob:
That’s putting the pedal to the metal. That’s like getting on our toll road between Austin and San Antonio. And the speed limit goes up to 80 and 85. That’s where that’s going to fall. That’s going to fall at a risk measurement of about 85. It’s 100% equities. Normally, historically over time, that’s been our greatest returns, but it has the greatest risk. It’s going to have a lot of volatility in. You’ve got to be careful of the emotional risk in that type of portfolio, because it’s really going to move up and down a lot. And like I said, everybody wants to be aggressive growth when the market’s been great for five or six years, little do they know it’s starting to get very overvalued at that point, and it’s time for a break.

Bailey:
Sure. They’re going to have to buckle up. So Bob, you as a wealth advisor, you’re here to help guide people and walk beside them through the mine fields of risk and investments and help them build a portfolio that fits their risk tolerance, right? So what would be the steps to do that?

Bob:
Well, the way you get started is it usually just starts with a phone call. And then from there, we take it with our emails that go out and we do the risk assessment, and we look at the full financial picture and see how is this going to fit into your long-term goals. How’s it going to fit with your family? How’s it going to fit with your age and what age you are and when are you going to retire? So, we’ve got to look at all of that and put all that together before we start making recommendations about which portfolio or portfolios, because many people will use a combination of the different portfolios we havd for different investment objectives.

Bailey:
Wow. Well, this has been super educational and helpful, Bob. Thanks for taking some time to answer some questions and to help us figure out how to make some calculated risks.

Bob:
You’re welcome.

[CONCLUSION]

That’s all for now.

We invite you to listen to all of our past episodes covering many financial topics from a Christian Perspective. To make sure you don’t miss any of Bob’s upcoming episodes you can subscribe to Christian Financial Perspectives on iTunes, Google Play Music, Spotify, or Stitcher. To learn more about integrating your faith with your finances, visit ciswealth.com or call 830-609-6986.

[DISCLOSURES]

Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the host, Bob Barber. Bob does not provide tax advice and encourages you to seek guidance from a tax professional.