The Cash Flow Clock: For Retirees - Book - Page 20
The Cash Flow Clock
Risk
Risk is a part of life. Every decision we make is impacted by risk to some
degree. That is especially true of our investments. Risky Money
investments not only can lose, they will lose. We just aren’t sure exactly
when or how much.
With so much uncertainty and potential losses, why does anyone expose
their hard-earned money to risk? Because it offers the highest potential
long-term growth. Why is growth so important? Because there is more than
one way to lose the value of your assets. One way is by losing in the market.
Another is by losing to inflation.
Market losses can be significant, but they are not consistent. Inflation,
however, is ever present. We don’t know exactly what the rate of inflation
will be in a given year, but we know that it will affect our investments. That
is what makes Lazy Money lazy. It does not keep up with inflation in the
long term.
The average inflation rate over the last 100 years was 3.3%. Over the last 10
years, it has been about 2.8%. If inflation stays at that rate (a big if), it
would mean that expenses would double every 25 years. Any assets left
under the proverbial mattress would lose half their value over that time.
Lazy Money should give us some growth at least. But it will not prevent our
assets from losing value to inflation.
Risky investments give us the best opportunity to not only keep up with
inflation but to significantly grow the value of our assets over the long term.
This is critical because we will rely on these assets for cash flow in the
future. Yet, as important as risk is to our investment plan, the financial
services industry seems to do a lousy job of talking about it, much less
helping investors understand and manage it.
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