WTOP Interview: Uncovering the Risk of Investing Too Conservatively

Interview Transcript:

Hillary Howard: Conservative investors avoid taking unnecessary risks by putting their money into things that are considered safer, like bonds and if you are a risk averse investor you might be surprised to know those safer havens could be riskier than you think.

Shawn Anderson: Well, joining us to talk about this, Nina Mitchell co-founder of Her Wealth and partner at The Colony Group in Bethesda, good to have you back Nina.

Nina Mitchell: Great to be here, thank you.

Hillary: Hi!

Shawn: So, what makes bonds in a similar so-called safe investment riskier than we would think?

Nina: Well, I just want to address a few misconceptions about conservative investors have about risk and when it comes to bonds particularly. The first it is that bond investors are really faced with a double whammy right now, you’ve got historically low interest rates and then you have a Fed that appears to be gradually increasing interest rates and when interest rates rise, bond prices fall because investors can buy new bonds at a higher yield. So, rising interest rates can be especially hard on investors who own long term bonds and think about it – it makes perfect sense because you’re receiving lower interest payments over a longer timeline. And just to give a quick example you know a bond with a 10 year duration or timeline will fall in price about ten percent for every one percent rise in interest rates and that’s a big loss.

Hillary: What are the risks for someone who’s out of the market completely Nina and they may be holding too much cash?

Nina: Well, it’s really difficult to build wealth if you’re sitting on the sidelines and if you’re totally out of the market because you just don’t have a growth engine and you’re also just not taking advantage of long term compounding. The biggest risk if you’re in cash like investments is that inflation and taxes are going to actually cause your savings to lose money over time and there’s a chance that you’re going to outlive your savings and people just don’t realize that inflation is a big factor. And we’ve enjoyed a very low inflation for many years but costs like health care are rising fast and for retirees, you know health care expenses are projected to be closer to like five and a half percent a year which is more than triple the current U.S. inflation rate and more than double what Social Security cost of living adjustments are, it’s a big bite.

Shawn: So, what would you tell someone who lost money in 2008, they got scared and they’re concerned about another downturn at this point?

Nina: Well, we did just hit another stock market milestone with the DOW being over twenty three thousand one fifty, so that’s good news for equity investors but bad news for investors that are not in the market and I think there’s far more opportunity risk by being out of the market entirely or trying to time the market than just staying invested for the long term. For that portion of your portfolio, which you’ve allocated to equities and we talk a lot about investing in a well-diversified portfolio of multiple asset classes and just doing periodic rebalancing, fell high, buy low and you know market volatility is just a normal part of investing. You can’t fear every market downturn, nor can you predict it and corrections of ten percent or more happen about once in any given year and the good news is just keep in mind like for the twenty years ending 2016, the average return for the S&P 500 was just shy of eight percent, despite two major market downturns. So, again you just can’t time the market and you don’t want to be out of it entirely.

Hillary: All right Nina, thanks so much. That’s Nina Mitchell with The Colony Group in Bethesda. For more about timid and aggressive investing go to WTOP.com, search Her Wealth.