Your Money: What to do when you're risk averse

Luke Davis
Your Money
Luke Davis

As a young person I was raised on game shows. They were a staple of daytime viewing for our family. Part of the appeal of many of these shows was seeing how much individuals were willing to risk to win big. Shows like “Let’s Make a Deal,” “Who Wants to be a Millionaire,” and “Deal or no Deal,” built much of their drama from the predicament contestants would find themselves in choosing between the sure thing and the chance for more.  

For many of us, watching others struggle with these decisions is much more enjoyable than facing them ourselves. However, that is the situation we are often faced with when investing, particularly in retirement. Do we put all our money in tech stocks with huge upside potential? Do we stick to the classic blue chip stocks with centuries old track records? Do we even invest in the market with all its ups and downs?  

With the dot-com bubble of 2000, the events of Sept. 11 in 2001, the financial crisis of 2008, and the COVID-19 panic of 2020, we have seen our fair share of volatility in the market over the past couple decades. For those like me who are risk averse, being in the market can feel a like a real-life version of one of these TV shows.  

That’s why over the past 5-10 years I have often thought being an annuity salesman has to be the easiest job on the planet. You are literally selling a “sure thing” to people uninterested in winning the grand prize.  

Generally speaking, a fixed annuity is a type of insurance contract that offers the buyer a specific rate of return on the contributions they make to the account. Regardless of what happens in the market or in the world, they are virtually guaranteed to receive growth in their account at a consistent rate agreed upon by both parties at the time the annuity is purchased.  

However, as we should all know by now, there is no such thing as a sure thing and these types of annuities pose their own form of risk, particularly in the form of inflation. Until very recently, inflation has played such a negligible role in our economy it is understandable why many no longer feared this dangerous economic phenomenon and chose fixed income products. 

However, when the labor department announced in June that the consumer-price index had risen by 5.4% compared to the same time a year earlier, it served as a shocking reminder to many that inflation is still a very serious threat, particularly to those on fixed incomes.  

All of a sudden earning a fixed 2% on your money doesn’t sound so good when the price of everything you buy is going up and more than double that. Suffice to say, I bet selling a fixed annuity is a little bit tougher today than it was six months ago. 

That’s why most investment advisors will tell you need to be invested in the market. They will argue there has been no more reliable thing to invest in than U.S. corporations. Through a well-diversified portfolio of domestic equities combined with some international holdings and bond funds, your best bet – according to them – is to simply invest in the markets and over time your money will likely grow exponentially.  

This set it and forget it strategy has certainly worked well over the past 100 years for those with the discipline and steady hand to stick with it. But what happens to those who are already risk averse when they see their savings drop by nearly 40% like the S&P did in 2008, or nearly 25% as it did in the first quarter of 2020? 

I would argue too many people using this strategy jump out of the market at the worst possible time and lose much of the upside investing in the market can bring.  

So, if fixed return products aren’t the best answer, and just riding the ups and downs of the market may not be either, what is the solution for people wishing to protect what they have from as many dangers as possible?  

I would argue working with an active investment manager is the best option. While we have already established that nothing in life is ever guaranteed, working with a money manager who can react to market downturns to try and protect your accounts from massive losses, while also providing you the opportunity to not only keep up with inflation but grow your real account value in a conservative way, is the best bet for those seeking to preserve their capital.  

Is it perfect? No, it’s not. But I would rather trust my fate to a plan that includes taking action to protect what I have built, than to simply be a spectator in my own future.  

(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)

Luke Davis is the director of operations and compliance at Stewardship Capital in Independence.