Aramco Expats

Protecting Your Assets from the Unknown

1. Lifestyles
2. Special Interest

Author: Donald Reilly
Released 2 September 2009

When it comes to investing your hard earned assets and building long-term financial security, simply chasing high returns is not your most prudent strategy. While achieving solid long-term returns is important, with high returns comes an inherently high level of risk. Risks that include a host of unknown factors and unforeseen circumstances. Failing to acknowledge such risk and not planning for life’s random, unexpected turns can be devastating to financial goals. This is why balancing your investments with an appropriate mix of risk and return in a well-diversified portfolio is paramount to achieving long-term financial security.

History shows us time and time again how investors often fail to factor risk into their financial strategies. Consider the technology boom of the 1990s when technology stocks were yielding 100% returns and more. During this time, many awestruck investors put their entire portfolios into this high flying sector, including one investor who put approximately $250,000 from his IRA rollover into technology stocks, growing the portfolio to $2.7 million at its high point. He’d planned to continue to invest solely in the tech sector and retire when the portfolio reached his goal of $5 million. He failed however to acknowledge the risk that the technology rally just might not last forever. When the technology bubble burst, his portfolio was worth a mere $70,000.

Similarly, when oil prices went from $40 to $147 a barrel between 2004 and 2008, many experts predicted that oil prices would continue to rise to $200 or $300 a barrel. Yet instead, the impact of the most severe recession since the 1930s sent prices back down to $40 a barrel. Consider the situation of the investor who put all his money in oil stocks, starting with approximately $750,000 and building it to approximately $15 million by buying on margin, a risky way to borrow money from your account to buy more stock. After oil prices fell, he had not only lost most of his investment but had a large tax bill from his trading activity.

More recently, between 2007 and February 2009, investors became overly confident in stock and housing market returns, only to encounter a stock market that fell over 50% and a housing market that in many areas fell just as much. Unforeseen circumstances, in this case the fallout from credit default swaps and sub-prime mortgages, left many investors who failed to plan for risk in their portfolios financially devastated. Who would have thought that reputable names like Lehman Brothers, Merrill Lynch, AIG or Chrysler/GM could go bankrupt? Or that Bank of America, Citibank and others would need billions of dollars from the government to save them from insolvency? Yet these “unknown” factors were real and profoundly impactful.

Despite its irony, planning for the “unknown” is an essential component of building a successful long-term financial strategy. In building your long-term financial plan, your financial advisors should first take into account what they already know. The first step lies in analyzing a wealth of information on factors such as equity and bond markets, the economy, political situation, world events and individual stocks. Next comes an evaluation of your personal financial situation to then determine an investment strategy that will be the most appropriate fit for you. Then your advisors should take into account how random and unexpected events could turn your carefully planned investment strategy on its head. This means carefully “stress testing” your investment plan against a variety of worst case scenarios to evaluate the impact of unforeseen circumstances. Protecting your assets means cushioning your investments from the unknown and the unexpected, including job losses, medical emergencies, family member death and other catastrophic life events. Such planning will ensure your portfolio is not only balanced, but that you are shielded from losing everything if one part of the market were to unexpectedly sour or if you were suddenly faced with a personal hardship.

Donald Reilly

Thinking about what could go wrong when things are going well both in the stock market and in your personal life is admittedly unpleasant. Yet markets tend to be cyclical and even the best of times can unexpectedly come to an end. Often the best laid plans fail without a safety net. Investing wisely involves obtaining a careful balance between risk and reward and building a conservatively invested, well-diversified financial plan that takes into consideration those unknown factors.

Donald Reilly is the CEO of Reilly Financial Advisors, an independent provider of professional investment management services and comprehensive financial solutions with special expertise in retirement and investment planning for current and retired employees of Saudi Aramco.

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