In the game of blackjack, you can ‘double down’ on a hand by doubling your bet for one more card from the dealer. (When playing blackjack, your goal is to create a hand that is as close as possible to 21 without going over) This action allows you to take additional risk for an immediate payoff. There are many baby boomers who are currently ‘doubling down’ with their retirement accounts by over-weighting their portfolios in high-risk ventures such as emerging market stocks and speculative real-estate in an attempt to pump-up the value of their nest egg before retirement. The risk of this strategy is that your nest egg could crack just before it hatches. If the market turns sour in the next few years, there may be a large number of baby boomers staying in the work force well beyond “retirement age.”
The hidden danger of highly volatile investments is that the risk of loss generally stays hidden until market disruptions push the value of multiple asset classes down simultaneously. In this case, there is not enough time to adjust your portfolio before it has been significantly burned. These types of situations are especially dangerous, because the market tends to change very abruptly as relevant news and information develop.
This is not to say that investors shouldn’t take risks… it is very difficult to generate returns in excess of bond or money market yields without taking risks. The caution is that you should be aware of the risks that you are taking, and not allow yourself to fall into a false sense of security because the market hasn’t had a significant downward movement lately. Large returns generally require that you take large risks. If you are currently earning large returns, chances are that you are at risk for a large adjustment. It is very important to make sure that a significant downward adjustment in value of your risky investments will not place you in a situation that you can’t recover from.
Sincere Thanks, Douglas J Utberg, MBA
Founder – Business of Life LLC http://www.businessoflifellc.com/
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