money matters
The many faces
of risk
by J. Lynn Davidson
Specid to Q-Notes
You tuck your nest egg safely away in a cer-
I tificate of deposit at your neighborhood bank
i and you think you don’t have to worry about
It. Your principal is secure, your return is guar
anteed and your investment is federally insured.
But, you may be surprised to hear that there’s
no such thing as an absolutely safe investment.
That’s because risk takes many forms — many
of which you should consider as you create your
investment strategy.
If you tend to be a conservative investor,
you’re not alone. In fact, a survey conducted
by The Gallup Organization and the Employee
Benefit Research Institute revealed that nearly
seven out of 10 investors favor the safe side
when it comes to risk. Because they fear the
loss of principal, many of them choose low-
risk, low-reward investments like bank CDs.
But, the comfort that comes with that strategy
could be cosdy.
An example cited by Consumers Union of
the US, Inc, illustrates why this is true: By pur
chasing a tried-and-true Treasury note paying
6.9 percent interest, you’ll collect $690 a year
on a $10,000 investment. If you plan to use
the interest as income and you are in the 28
percent tax bracket, you would get to keep just
$497. Assuming a steady 4 percent inflation
rate, in 10 years you would need $735 to buy
what $497 gets for you today. In this case, over
a period of time, taxes and inflation left you
with negative returns on your seemingly safe
investment. You can see by this example where
some of the other “faces” of risk come into play.
The key kinds of risk to consider
Market Risk— Seemingly unrelated fectors,
from world events to tax laws to the threat of
interest rate increases, can cumulatively affect
securities prices.
Interest Rate Risk—A sustained rise in in
terest rates usually causes trouble for stocks and
Military
Continued from page 1
responsibility to ‘judge the wisdom and fair
ness’ of any policy under the Constitution, we
will lose. Gays serving our country will lose.
And all Americans will lose. Our heartfelt
thanks should go out to Lieutenants Holmes
and Watson for their service to our country and
their dedication to trying to make the world a
better place for us all.”
Holmes and Watson have not announced
whether they plan to appeal the decision. The
next possible step for them is to ask the full
court for the Ninth Circuit Court of Appeals
to rehear the case en banc. Some argue that the
Holmes/Watson decision direcdy conflicts with
other Ninth Circuit opinions such as Meinhold
V. Department of Drfensevfhere the court ruled
that it was impermissible for the Navy to dis
charge someone who stated that he is gay. [Ed.
Note: See separate article in this issue for an up
date on Keith Meinholds case.]
pain for bonds. After all, who would want to
pay full price for an 8 percent bond when new
bonds pay 10 percent? A variation on interest-
rate risk occurs when rates decline. Called “re
investment risk,” this occurs when a recendy
matured bond (or any other fixed income se
curity) is replaced with one offering a lower
interest payment.
Economic Risk — In a growing economy,
stock prices tend to rise. Similarly, when the
economy slows down, stock prices usually de
cline.
Inflation Risk — With inflation hovering
around 3 percent in recent years, inflation risk
is less threatening than it was in the late 1970s.
Yet even during periods of moderate inflation,
“safe” investments like money market funds,
CDs and bonds can erode in value and reduce
your returns. That results in a loss of purchas
ing power — one of the greatest concerns for
investors living on fixed incomes.
Credit Risk — Investors who purchased
bonds issued by companies that uldmately went
bankrupt learned about credit risk the hard way.
That’s why bond quality is an important factor
for investors to consider.
Is time on your side?
Time can be your best ally when determin
ing your risk-reward strategy. If you don’t need
access to your money for 10 to 15 years, the
stock market may be an investment vehicle for
you. Despite its recent gyrations, the market
has historically trended higher over the long
term and has outperformed fixed-rate invest
ments. Of course, it’s important to keep in mind
that the stock market’s past performance is no
guarantee of future results. If you don’t have
the luxury of a long time frame, diversifying
your holdings may be a way to balance risk. By
investing in a variety of asset classes — bonds,
stocks, etc. — you can help cushion your in
vestments during market downturns and lessen
the effect of inflation.
The main thing to remember is that your
investment strategy should reflect your goals
and risk tolerance. Even though you probably
won’t ever completely elinunate risk in your life,
make sure that the level of risk in your invest
ment portfolio feels comfortable to you — and
allows you to rest easy at the end of the day. T
\J. Lynn Davidson is a financial advisor with
American Express Financial Advisors.]
The HolmesfWatson decision joins other
cases which have upheld “Don’t Ask, Don’t Tell,
Don’t Pursue,” including Thomasson v. /Vnjand
Seltand v. Perry from the Fourth Circuit Court
of Appeals, and Richenberg v. Perry from the
Eighth Circuit Court of Appeals. The United
States Supreme Court has declined to review
the Thomasson or Selland cases; the court has
not ruled whether it will review the Richenberg
case.
Another case that remains outstanding is
that of Able v. Cohen being litigated by Lambda
Legal Defense and Education Fund and the
ACLU. On July 2, Judge Eugene Nickerson for
the District Court for the Eastern District of
New York ruled that the military’s “Don’t Ask,
Don’t Tell, Don’t Pursue” policy is unconstitu
tional creating “special rules” that treat gay
servicemembers differendy than heterosexual
servicemembers for saying and doing the same
things. The Second Circuit Court of Appeals
will hear the appeal of that case at the end of
this year. T
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Realtor
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Q-Notes T September 20,1997 T PAGE 17
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