Sunday, January 10, 2010

The Six Classic Investment Risks – Can You Afford Them?


“Risk Tolerance” is a big deal. Every information gathering tool used by a financial advisor for a client interview addresses the issue of how much and what type of investment risk you can handle. It’s usualyy the advisor can cope with and find an acceptable investment approach – unless all the stock markets take a world-wide melt-down. Like they did twice in the last decade.

Then “Risk Tolerance” becomes a really big dea, although, by then, it’s a bit too late. Unless your investments have true guarantees built in to assure you that your hard-earned Nest Egg will never lose value, you had better get a better understanding of “Risk”. Let’s start here.

Defining Risk

Risk is the uncertainty tied to any investment decision that does not have guarantees. Since few of us can accurately predict the future, risk is then a factor in the decision-making process.
Here are the various forms of risk:
Market risk is the possibility that the value of an investment will either depreciate or appreciate because of fluctuations in the financial markets.
Interest-rate risk occurs when the direction of leading interest rates changes, directly affecting the value of an investment. (See those “safe” corporate or municipal bonds, that will go down in value every time interest rates go up.)
Inflation risk is the possible erosion of your purchasing power. An investment must yield a rate of return that exceeds the current rate of inflation to be considered a profitable investment.
Economic risk concerns the strength or weakness of near-term economic growth and its impact on investment return.
Political risk is the possibility that domestic or global political events may affect the stability of return on an investment.
Illiquidity risk is the possible absence of a buyer (or market) in the event that you are forced to sell. This typically affects real estate and collectibles.

Risk vs. Reward

Financial Advisors like to talk about “Risk vs Reward”, as if the higher the risk, the higher the potential increase in value in good times. But can you afford to have all your Nest Egg playing in the “Risk vs Reward” Game?

It is crucial to develop an investment mix that is suited to the (1) amount of Nest Egg that you can’t allow to be part of that game , and then, (2) the level of risk you are willing to assume with the rest. The point where you stand on the risk/reward spectrum depends on variables like age, family situation, current and expected future income, tax bracket, and overall net worth.

30 States Require Kids to Support Parents.

At last count, 30 states have “Filial Responsibility laws”. Whazzat?

These are laws that state that children have a legal duty to support their parents with necessities, if the parents are needy and can’t support themselves. Is your state one of them?

States with filial responsibility laws are: Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, and West Virginia.

Decades ago in Ohio, as a young lawyer in a firm, I was, as are all young lawyers in a firm, relegated to the law library, researching.

One day I stumbled on this law that said that children could be prosecuted if they did not support their needy parents. Even back then before Medicare, Medicaid, Food Stamps, and all the other entitlement programs, this looked really weird.

I showed it to our lead attorney. He had never heard of it, either. And he thought it was weird, too. I put it out of my head until a few years ago. Then I ran across an internet article by Jane Gross, who had researched it. Why would she do that? She probably got a grant, or something.

That’s where I found out that 29 other states had similar laws.

Wouldn’t it be nice if we could enforce these laws? But we probably can’t. We probably never could. But it was the intent of these states to put into law what we all know we should do.

Why bring this up? Because more than any other responses I get when I bring up the need for Long Term Care Insurance is, “The kids will take care of me”. Oh yeah? Have you asked them?

Today, with fewer kids than in the “old days”, with families living farther apart, and with the daughters (traditionally, once upon a time, the primary care givers) almost all having jobs outside the home, too, the kids are the classic “Sandwich Generation”. They may not be able to do it.

Just like those old, well meaning, but ultimately useless laws, the idea that the “kids will take care of me” has gone the way of the buggy whip. It’s time to take a serious look at this issue.

10 Steps to Less Stressful Caregiving

Inspired by an article received from the National Academy of Elder Law Attorneys newsletter:

Taking care of an elderly loved one can be exhausting and stressful. Often due to the lack of outside help, a devotion to the person needing care, or the tunnel vision that can accompany exhaustion, caretakers don't take care of themselves.

But they must. Failure to do so can lead to burnout, injury or illness. If you are the caregiver, any of these results will harm your ability to care for your loved one. Here are some ways to take care of yourself and make sure you can take care of your loved one. The list is adapted from New York Times columnist Jane Brody's excellent Nov. 17, 2008, column, "Caring for Family, Caring for Yourself."

Take a break every day. Make sure you have some down time to relax, whether it's watching television, reading the newspaper, or calling a friend. Make sure you do at least one thing for yourself every day.

Take a break every week. If possible, get out of the house at least once a week to do something you want to do -- go to the movies, have dinner with friends, whatever works for you. If you cannot get someone to cover for you, have friends over to your house.

Get respite. Take a break of at least a week at least once a year. You can hire help in the house or arrange for a respite stay at an assisted living facility or nursing home.

Get regular exercise. It's necessary for your health and to moderate any stress you may be feeling. If you can't get out of the house to exercise, buy or rent a stationary bicycle or other exercise equipment.

Eat well. Make sure you stay healthy and have sufficient energy to do what you need to for your loved one.

Get enough sleep. Lack of sleep will sap your patience and reserves, making it more difficult for you to provide the care you would like to give your loved one.

Join a support group. You are not in this alone. Others are going through similar experiences. Here are sources for finding support groups: the National Family Caregivers Association (www.nfcacares.org) and its Community Action Network (www.thefamilycaregiver.org), and the Family Caregiver Alliance and its online support group (www.caregiver.org).

Hire a geriatric care manager. An experienced geriatric care manager can help you determine whether your loved one is receiving the most appropriate care and what resources in the community are available to assist you.

Consult with an elder law attorney. In order to access many of the programs recommended by the geriatric care manager, your loved one will have to qualify financially. An elder law attorney can help you qualify for these benefits. In addition, make sure you don't get hit with a double financial whammy of losing years of earnings while you're caring for your family member and losing his or her assets due to squabbles with other family members or Medicaid estate recovery. Also, you may be entitled to some pay by the state for the care you are providing.

Lotsa Helping Hands. Check out www.lotsahelpinghands.com as a resource for getting volunteer help in your community and coordinating the help your family and friends already provide.

Think of the care you are providing as a marathon, not a sprint. You need to pace yourself and conserve your energy for the long-term. Too much stress and exhaustion won't help your loved one.