Tuesday, January 5, 2010

Risk Management: The Financial Safety Margin

Investing is a part of our culture. Many of us invest a portion of our income for our needs, present and future. However, investing carries with it an element of risk. Therefore, it makes good sense to build a safety margin into your personal investment plans.

Playing the stock market is virtually a national pastime. However, as recent history has proven, the value of stocks can plummet, sometimes quite rapidly. Therefore, some investors will attempt to pay the lowest possible price for stocks. If the floor should fall out from under that stock, you stand a good chance of recouping most of your money.

Even if your cash flow is healthy at present, always be prepared for the inevitable. Many jobs today are not 100% secure. Take a couple of months of living expenses and tuck the money away in a savings account or money market.

The dream of many newlyweds is the purchase of their first home. Many, though, make the mistake of sinking all their available cash into that purchase and further committing both their salaries to make the monthly mortgage payment. If you can't afford the mortgage on one salary, think twice! If one job should disappear, you could face serious problems.

At the other end of the spectrum are those heading into their retirement years. Is your investment portfolio secure? Will you be able to rely on it? If you assume that the portfolio will generate a double-digit annual return, you may be surprised. Markets have proven to be rather volatile. It would be wiser to assume a much lower rate of return. Also, when you calculate withdrawals from your initial portfolio, experts advise withdrawing no more than an inflation-adjusted 4% each year. This amount will allow you to remain in a fairly stable condition, however the market moves.

Remember that investments mean risks and a safety margin is your best insurance policy.

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