$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WEALTH HEALTHY WOMEN [TM] Healthy Attitudes ==> Wealthy Women [TM] Volume 2, Number 5 October, 2001 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WELCOME to Wealth Healthy Women [TM], a free e-mail newsletter for women seeking greater financial freedom and well-being. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IN THIS ISSUE: 1. Note From Your Editor, Lynne 2. Article: Understanding Risk 3. Spotlight: What an Economist Has to Say About Finances 4. WealthHealthy Announcements ************************************************************ Note From Lynne A month has passed since the tragic attacks on the World Trade Center and the Pentagon. We have slowly been getting back to life's usual Fall events -- attending our children's soccer games, pulling sweaters and coats out of storage, checking our home heating systems. However, there is a pervasive sense of sadness and somberness. We collectively mourn for those lost or left in the wake of the September 11 attacks. Many of us are reflecting on the meaning of life, and our priorities. There is fear and uncertainty. The United States is mobilizing globally against terrorists. We read in horror about the growing number of anthrax cases, and fear what might be coming. We have seen the impact of these tragic events on the economic markets. And, these events were layered upon 18 months of falling stock prices. How are these factors affecting our money lives? Jonathan Clements, in a recent Wall Street Journal article, states "What has really been lost is our appetite for risk." What exactly is financial "risk"? What kinds of risk should we as investors be thinking about? What emotional factors influence our perceptions of risk, and consequently our spending and investing behavior? Those are questions addressed by this issue's feature article, "Understanding Risk." In uncertain times, the greatest gift that we can give ourselves and our loved ones is taking charge of our financial lives. Join in on a free teleclass, "Tips for Weathering Insecure Financial Times". See the WealthHealthy Announcements section for details. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Feature Article: Understanding Risk For years I never really understood, or felt the need to understand, the notion of investment risk. I was relatively young. My income was steadily rising. And it was the 1990s -- the economy was on a seemingly unending upsurge. I had an "emergency" fund in a tax-free money market that could cover 3-4 months' expenses. My retirement accounts were invested primarily in growth and aggressive growth stocks and funds. I had to muster all of my common sense to follow my financial planner's advise to invest 15% of my portfolio in bonds. What did I learn over the past 18 months as the economy slowed, the stock market slumped, and folks are using the "R" word (recession)? I began to critically examine my level of risk tolerance. I realized that I'm not as "bullish" on risk as I thought. Like many people, my risk assessment was influenced by the optimism of the marketplace. I'm learning more about risk every day. Let me share some of that learning with you. $$$ What is Risk? $$$ Paul Merriman (Bottom Line - Personal, October 15, 2001) states: "Investing is simply finding a way to get paid for taking calculated risks...Most investors think of risk as the chance of losing money on a stock. But it is more complex..." $$$ What Kinds of Risk Should We Think About? $$$ Let's look at six types of risk (extracted from Merriman's article) that can influence your financial well-being. Some of these may be more obvious to you than others. 1. Event risk - What we are seeing today with the terrorist attacks. Unexpected events can significantly impact segments of the market. We cannot predict them. How to protect yourself? Have an emergency fund to cover 3-6 months' expenses. Avoid panicking and making reactive financial decisions. 2. Inflation risk - How inflation erodes the purchase power of your money. For example, you estimate that you could retire today on $50,000 and live comfortably. Merriman points out that if inflation is 3%, you would need $104,700 in the year 2026 to live at that same level! How to protect yourself? When planning for retirement, calculate your income needs using different levels of inflation, to get a realistic picture of how much money you must save. Keep in mind that inflation can vary from region to region in the United States. 3. Manager risk - How your personal money manager or mutual fund manager invests your money. What do they (or you) select for your portfolio? Do they match or beat the market indexes? How to protect yourself? Research and select your managers thoughtfully. And, while you may choose a mutual fund because of its manager's success, remember that funds can change hands. So, keep abreast of changes in your funds' management. 4. Market risk - What the market is doing when you want to buy or sell. Numerous economic, political and psychological factors make it incredibly difficult to predict market fluctuations. There is a saying among money managers: "Trying to time the market is like trying to catch a falling safe." How to protect yourself? Develop guidelines for investing and stick to them. The general rule of thumb is that stocks will rise over the long-term. However, it is equally important to examine your guidelines periodically to see if they need to be adjusted or changed based on changing needs and circumstances. 5. Asset risk - Investing in specific asset classes, such as small-cap value, emerging market, precious metal stocks. Many investors move into asset classes that have been doing well -- but too late to benefit. How to protect yourself? Be cautious about jumping on the latest "hot" sector. Diversify your portfolio. 6. Liquidity risk - Putting your money into investments such as real estate or a small business that could be hard to sell quickly if you need money. How to protect yourself? Have the majority of your investments in stocks, bonds, and mutual funds. Having a cash reserve of three to six months' expenses, mentioned under Event risk will also help to protect you. $$$ What Emotional Facotrs Influence Perceptions of Risk? $$$ The two most frequently mentioned emotional factors influencing investor risk are greed and fear. When the stock market was booming, individuals were making fortunes on hot speculative stocks. Other investors didn't want to be left behind, and followed suit. Some made fortunes, others gambled away their savings (or more). Another way of looking at this behavior is that, when the market goes up, people get optimistic (Clements, 2001). That certainly happened to me. I didn't have visions of making millions, but I certainly was intrigued by investing as well as I could. And optimism can breed overconfidence, an emotional factor discussed in the April 2001 issue of Wealth Healthy Women. Fear is the other key emotional risk factor, perhaps even more powerful than greed. It can be worse to lose something than to walk away from something you never had (Koval, 2000). Fear can push investors into throwing in the towel when the market is at or near the low end of its cycle because they can't stand the losses anymore, referred to as capitulation (Clements, 2001). They may also be driven to buy when stocks are at their peak out of fear of losing out on something big. When the market has been down for a while, investors can become pessimistic and fearful of getting back into the market. The downside risk is that they can miss the opportunity to recoup losses they incurred earlier. We are currently facing this situation, as predictions are being made that the market will pick back up in the next several months. How to protect yourself? Get to know your true tolerance for risk, and your characteristic emotional responses when that level is exceeded. Return to the fundamentals of investing, which are discussed in any good financial planning materials. Or discuss them with a financial planner. Decide on savings and investing guidelines that you can live with for the long-haul. $$$ What Now? $$$ Keep in mind a key element of the WealthHealthy philosophy: INFORMATION IS EMPOWERING. Often, information can initially feel dissettling or uncomfortable. Think about that as a good signal--discomfort can be the energy source for change, if you can take a step back and "read the data." Consider getting some support in assessing your response to risk and establishing an action plan for greater financial security. Join us for a FREE WealthHealthy teleclass on "Tips for Weathering Insecure Financial Times". See the WealthHealthy Announcements section for more details. References: Clements, J. Gauging Investors' Appetite for Risk. The Wall Street Journal, September 18, 2001. Koval, J. Greed, Fear, and Your Safety Net. Inside Personal Finance with Ron Edelman. June, 2000. Merriman, P.A. Risks Most Investors Don't Even Think About and What to Do to Protect Your Assets. Bottom Line - Personal. October 15, 2001. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Resource Spotlight -- What an Economist Has to Say About Finances Given the shifts in the economy over the past 18 months, I was curious as to how an economist would be thinking about finances, and what that perspective would have to offer to Wealth Healthy Women readers. I spoke with Jud Heriot, Ph.D., an economist by training and experience, who self-manages his investments and follows the markets closely. I asked him how his background in economics influences his investment management, and what advice he'd give to WHW readers. Here's what Dr. Heriot said: "Economics and finance are related fields, but economists do not necessarily make good financial analysts, nor competent portfolio managers. The questions they ask and the issues they address are very different. Nonetheless, my experience as a economist has taught me about rational choice, and has made me a better investor. Every decision bears an opportunity cost: if you choose A over B, you forego the benefits that would have accrued to B. For example, if you invest in General Motors stock rather than, say, improvements to your home or a year of post-graduate work, you may forego higher property values and a higher salary. Consequently, any returns to your General Motors stock should be adjusted to reflect the benefits that you could have received from these alternative investments. My advice? Do not become myopic. Focus on the totality of your investments, as well as the costs and benefits of every decision." The concept of opportunity cost really caught my attention - remembering to examine returns from any investment in light of what I'd give up by not investing it elsewhere. It means making investments with an eye on the total picture of your life, which is what being Wealth Healthy is about -- living fully and being directed by what you value in life. Thanks, Jud! I invited Dr. Heriot to be a guest on the next Wealth Healthy teleclass call. See the Announcement section for details. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WealthHealthy Announcements 1. FREE WealthHealthy Teleclass on "Tips for Weathering Insecure Financial Times". Too busy - or too afraid - to look at your financial picture? What about your credit cards, spending habits, your plan for saving? Gain support and strength in the company of others who want to feel more secure. Join us in an informative, interactive teleclass that will help you move forward. Have the opportunity to talk with Wealth Healthy guest, Dr. Jud Heriot, an economist who self-manages his investment portfolio and is an "ace" at practical solutions for increasing one's financial security. When: Monday, October 29, 8:00-9:00 PM EDT Cost: FREE Register: Send an e-mail to Lynne@WealthHealthy.com. Put "Weathering" in the Subject box and include your name, phone number and e-mail address in the body of your e-mail note. You will receive a confirmation of the teleclass, and further instructions for accessing the special phone line for the call. 2. Four-session WealthHealthy Teleclass on "Overcome Overspending Now!" Examine your spending patterns. Identify where you are in the stages of change. Develop strategies to begin changing unhealthy to more effective spending patterns. This supportive, action-oriented class is easily accessible by telephone from the convenience of your home or office! When: Four consecutive Wednesdays beginning October 30 8:00 - 9:00 PM EDT. Cost: $99.00 for the 4-session class. Register: Send an e-mail to Lynne@ WealthHealthy.com. Put "Overcoming Overspending" in the Subject box and include your name, phone number and e-mail address in the body of your e-mail note. You will receive a confirmation and further instructions for accessing the special phone line for the call. $$$$ To hear a 10-minute description of the WealthHealthy approach, as well as a bit about me, you can call 1-212-461-2660. If you are interested in coaching, simply e-mail me at Lynne@WealthHealthy.com or call me at (202) 387-5923. Please include your name, e-mail address, phone number and brief description of your interest in being coached. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Pass this newsletter along to friends, family, and colleagues who also may be interested in moving toward greater financial freedom and well-being. They can get their own free subscription by going to http://wealthhealthy.com and signing up - it's as simple as typing in their e-mail address. Or, send an e-mail to whw-request@WealthHealthy.com with the word "subscribe" in the body of the letter. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NOTE: Wealth Healthy Women [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Copyright 2001 Lynne Hornyak All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONTACT INFORMATION Lynne Hornyak, Ph.D. WealthHealthy.com Phone: (202) 387-5923 Fax: (202) 986-8980 e-mail: Lynne@WealthHealthy.com Web: http://WealthHealthy.com