A Plastic Fork in the Road

by Kemberly Wardlaw

Published on this site: December 9th, 2005 - See more articles from this month

Planning for your financial direction can be difficult. At times it may even be confusing and frustrating. Important questions arise both before and after we make decisions. Is this the right financial product or did we make the right decision? We have several paths to choose between now and our future and there is a wealth of information at our finger tips.

Due to the abundance of information, a person reaches a financial fork in the road and must make a decision.

Unfortunately, the routes of choice may seem more like a plastic fork in the road—brittle and inefficient. We require reliability and assurance, not fragile opinions. It isn't until our journey concludes that we may evaluate our progress.

During the journey, you will be faced with several twists and turns; risks that may affect your future and the future of others. Purchasing power risk is the quiet storm on our journey and has the potential to break that plastic fork in the road. Also known as inflation, it is the uncertainty that future costs will erode your purchasing power in obtaining goods and services. This enemy of your savings has the ability to consume your capital.

An often overlooked type of risk is reinvestment rate risk. This is the risk associated with reinvesting the earnings on your principal at a lower interest rate than the initial investment. With another meandering path at your footsteps, you may wonder: Will I earn more or less than the anticipated yield once dividends accrue?

Finally, we have market risk. Market risk is simply the uncertainty of price movement. This definition applies to several asset classes such as stocks, real estate, bonds, and collectibles. Price fluctuations typically prove to be a bumpy ride, thus a map of our financial journey may include multiple routes and diversification. Remember, as prices of multiple asset categories move, some will move inversely.

There are several ways to cope with the risks mentioned in the above text as it pertains to your unique portfolio. One immediate way to deal with several types of risks is to review your current financial plan and asset allocation. There may be potholes that require filling or directions that should be avoided. As with diversification, it cannot eliminate all aspects of risk; however, it may help prevent dependence on any one over-weighted position.

It helps to keep aware of your goals. This allows for a clear focus. Also, periodic reviews are important. If it is once a year or more often, schedule a time with your portfolio to confirm you are on the path toward financial happiness.

The road to a smooth financial plan may have several plastic forks in the road. When faced with a decision, the educated person will better understand his/her destination and the route that precedes it. You must navigate through these alternatives to have a happy future.

Wardlaw's belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. With that philosophy, the author assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at [email protected] or visit http://www.tools2invest.com