You can take steps to control your risk

The Baltimore Sun

Every piece of your financial life involves at least a bit of risk. What made last week extraordinarily rare, and so terribly frightening, was that all of the threats were on display at once.

The stock market took the biggest one-day fall in seven years (though it bounced back). With thousands of financial services jobs gone or in jeopardy and the economy threatening to slow further, you had to wonder whether your job might be next.

Then there was insurance. Maybe once a decade, a big insurance company is on the brink. Last week, global giant American International Group had a near-bankruptcy experience, leading scores of people to worry themselves sick over their annuities and life insurance policies from AIG and others. All these developments have the mortgage mess at their root, leaving anyone who owns a house (or wants to) wondering when real estate prices will find a bottom.

The stunning confluence of these events was bad enough. But the fact that the federal government might be on the hook for untold billions of dollars just made the pain worse.

I don't know how or where this will end, and neither do any of the experts. It's a humbling time for everyone. The temptation is to either make drastic changes in your financial life or do nothing and hope that the impact is not too severe.

So here's another idea, a middle path of sorts. Consider a few modest but concrete things you can do to reduce your exposure to four of the big areas of risk - investments, job security, your mortgage and insurance - that have been front and center lately.

Investments:

Before you do anything with your portfolio, ask yourself this: Do you still believe in capitalism?

Several financial planners I spoke with actually felt the need to stop and reaffirm the fact that companies will still need to raise money from investors - any quasi-socialist, short-term federal government intervention aside.

Andrew Orr, a financial planner in Orlando, Fla., says clients with money in index funds are investing in 17,000 companies that seek to generate earnings and pay dividends. That, he says, is a sustained bet on capitalism itself. "Capitalism is not always pretty," he said. "But it's evolved and gotten better, and there are clearly going to be more protections to come."

If you're younger than 50, you can start by protecting yourself against the biggest danger of all: outliving your savings. Thomas Fisher, a financial planner in Cambridge, Mass., said this is one risk that people generally underestimate. "Our parents haven't usually run out of money. There has been a whole generation of people with pensions."

Those days are gone, though. And as he took calls last week from clients considering bailing out of the stock market, he said he realized how few people really understand the big picture. The most acute long-term risk is, in fact, too little risk. Unless you're saving a huge chunk of your income in cash, you'll need consistent exposure to riskier investments like stocks to produce a suitable retirement balance. Keep your stock allocation lower if you must for a few months, so you can sleep at night, but don't get rid of it altogether.

Most people get back into stocks once you explain this. A bigger challenge now is the one facing those who are in or close to retirement and whose portfolios have declined in the past year.

Rebecca Rolfes, a 59-year-old marketing executive in Chicago, has ridden out down markets before, but now her time is shrinking along with her assets. "I keep going on my mutual fund sites but not actually doing anything," she said.

Even if you can't bring yourself to make big changes to your portfolio, spending just a bit less money in retirement can make a big difference.

"Small changes in retirees' burn rate will affect them far greater than what the market will do today," said Bill Schultheis, of Sagemark Wealth Management in Kirkland, Wash., and author of The Coffeehouse Investor. That's because overspending is a risk you can control.

Job security:

Aside from the job losses at financial services companies in the news, there was also concern that the economy could slow significantly and ultimately affect employment levels everywhere.

Last week, people who work for themselves seemed to feel better about their prospects than those who work for large companies. "It feels safer than having a job with a single employer," said Mike Sanislo, who helps companies with new product development through his firm, High Energy Consulting, in Woodbury, Minn. He says he expects to lose clients every so often, but his business doesn't fall apart when one goes away.

Though you might not be ready to chuck it all and hang out a shingle, it's worth considering the approach that Kathy Santos has taken.

Santos, a webmaster in Pepperell, Mass., has a job by day at the environmental nonprofit group Earthwatch Institute, but she is developing a Web design and photography business on the side, Rhino Hill Studios, to spread out her income risk. She also picks up a bit of extra money as an emergency medical technician for the town.

Mortgages:

All the problems that exotic mortgages have caused have, hopefully, taught some important lessons about interest rate risk. This is something you can really control. If you're applying for a new mortgage now, a fixed-rate mortgage means no risk that the rate will go up. If you have an adjustable-rate mortgage and have enough equity in your house to refinance, now's the time to get a fixed-rate loan.

Here's another certainty for those skittish about investing: If you put extra money beyond the minimum toward the monthly payment on a 6 percent mortgage, you're effectively earning 6 percent by ridding yourself of that extra debt (though the number is a bit less if you're taking advantage of the interest tax deduction).

That's what Nell Eakle of Sterling, Ill., has been doing, even though she had to ratchet down the overpayment because of a bout with breast cancer. "We just want to be a little bit ahead," she said. A bonus is that the extra payments mean the mortgage will hit zero about two years ahead of schedule.

A few caveats here. Given the tightened policies among home equity loan providers, you might not be able to easily get this money back out of your house any time soon. Also, it makes more sense to first pay down 18 percent credit card debt or max out any 401(k) match that your employer provides, even if you're parking the money in cash.

Insurance:

AIG's crisis suggests one simple tactic to reduce your exposure to troubled institutions: Split your life insurance policies and annuities among more than one provider.

Many of the things that insurance protects against are precisely the sorts of risks over which people have the most control. In uncertain times, there's some small comfort in taking measures to avoid having to use the insurance.

"Stay in during the first snowfall," suggested Kevin Albaugh, an engineering consultant in Williamsville, N.Y. "That will shake out all of the people who don't know how to drive on it. That's usually when you see a bunch of SUVs off the side of the road."

Michael Fripp of Carrollton, Texas, says the only risk he can control is the health risks from the stress. "The financial risks are beyond my control (and a little beyond my understanding)," he wrote in an e-mail. "I am bicycling to work, walking with the kids and ignoring the 401(k) balance."

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