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investment risk

This is a guest post by Patrick Collins of Schultz Collins Lawson Chambers, Inc., the firm we hired to advise us on how to handle Kazan Law’s pension funds, our charitable foundation’s funds, and that some of our partners hired to advise them on personal money management.

The decision on what lawyer to hire is the most important financial decision almost every family will ever make because so much potential money is at stake. If litigation goes well, the next decision is what to do with the proceeds so that the money is there and stays there to meet the family’s needs for many years to come. We thought it would be useful to offer information to help you understand what questions to ask, and what factors that go into money management are important.

Who Needs Investment Risk?

My previous post discussed how uncertainty makes risk seem riskier.  OK–so what is investment risk?  As a general proposition let’s define risk as the possibility of losing some, or all, of your investment principal.

The horrible byproduct of taking investment risk is that losses may trigger considerable regret.  Had you not taken the risk, the money would still be in your pocket.  Damn.

Here are some propositions for you to consider:

Proposition One:  Wealthy folks don’t need to take investment risk.  If you have a sufficient amount of money to support your spending and bequest needs, you don’t need to earn high investment returns.  Billionaires like Bill Gates and Warren Buffett do not need to make risky investments—even if they never earn an additional dime, they will never be able to spend all of their wealth.  This is why the super-rich give hundreds of millions of dollars to charitable causes.  If you are super-rich, you don’t need more money.   No need = no reason to take risk.

Proposition Two:  The amount of risk you need to take depends on the budget required to support a target standard of living for yourself and your family.  All else equal, the higher your monthly budget, the more you may need to supplement existing wealth with money earned from future investment returns.

Proposition Three:  It is not just your level of spending that determines the amount of investment risk that you need to take.  Rather, it is the level of spending relative to your existing wealth.   If you have a million dollars and want to live in a cabin in the woods and be self supporting, you probably do not need to send much, if any, of your current wealth into the future.  If you have a million dollars and want to live like Donald Trump, you probably need to consider how to fund a great many future expenses.   A need for money to pay future bills = a reason to take investment risk today.

Proposition Four:  Without risk there is no reward; taking risk, however, does not guarantee that you will be rewarded.  The whole idea of risk is that the value of an investment might shrink instead of grow.  As a consequence, you must plan your investments carefully and take only the risk that you really need to take—not too much, not too little.

The first step is to figure out a budget—even if you do it on the back of an envelope.  Write it down.  Look at it.  Chances are you’ve forgotten some important items so bump it up.  Put in a margin for unexpected expenses.  You are on your way to determining if you have the luxury of avoiding investment risk; or, if you need to become an investor.

The posts provided by Schultz Collins Lawson Chambers, Inc. [SCLC] convey information on basic investment concepts.  They are intended to facilitate prudent investment decision making.   They should not, however, be the sole factor in making investment decisions; and, they are not intended to act as advice or recommendations for any specific investor.    SCLC acts as Independent Investment Counsel and is a Registered Investment Advisor.  It does not provide legal, accounting or tax advice; and the opinions expressed in the posts are solely those of SCLC.  You can find additional information about SCLC, their personnel, and client services at www.schultzcollins.com. 

Related posts:

Financial Risk and Uncertainty

How Much Investment Risk is Suitable for You?

What is Investing?

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Amir Hussain

Amir Hussain is the founder of Freemium World, a geek by nature and a professional Blog writer . I love to write about new technology trends, social media, hacking, blogging and much more.

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