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There are many financial risks that investors want to protect
themselves from (inflation risk, interest rate risk, market risk,
etc). But there are three risks that most investors don't take into
account and I believe not doing so can quickly get them into
trouble. I call them control risk, access risk and flexibility risk.
Let me explain.
When I refer to control risk, I'm talking about your ability to
exert control over your money. Since you are the one that will have
to reduce your standard of living if something happens to your nest
egg, it's vital that you retain control over it. The problem with
annuities, life insurance and other packaged products is that you
immediately lose control over your money. You are ceding control to
someone else. They are the ones in the position of power because
they get to decide what is done with your money. They use contracts
that specifically limit your control and give it to them. Why would
you ever want to surrender control over the most important financial
asset you will ever have? It doesn't make sense!
The second risk that people fail to think about is access risk.
Whose money is it? It's YOUR money. If you own something, shouldn't
you be able to access it any time you want? You own your home and
you can use it whenever you want. Imagine giving your home to
someone else where they control what happens to it and you can only
access it when THEY allow you to. That doesn't make any sense, yet
that is exactly what happens when you buy many of these packaged
products.
There's no way to know what life is going to be like tomorrow. Few
could have imagined the terrorist attack of 9/11. Few expect to be
in a car accident. No one thinks that they will have a heart attack
today, but there's no way to know.
Let me tell you a true story that just happened. My neighbor had
some friends stop by yesterday. These snowbirds, were driving their
motor home from Arizona back to the Northeast. As they were driving
across the barren roads of west Texas, they didn't realize that
there had been an auto accident up ahead. The accident had happened
on the other side of the Interstate, but a highway patrolman had
stopped traffic in their lane and a single car had come to a
complete stop. For some reason, the patrolman's car had no flashing
lights to get their attention.
You probably know what happened. The speed limit was 75 mph there
and although the motor home wasn't going that fast, it takes a long
time to get one stopped. He didn't see the stopped car until it was
too late. He swerved around it, barely missing it, but the truck he
was towing clipped the back end of the stopped car, totaling their
truck. But it gets worse. As he swerved around the stopped car, the
patrolman stepped out right in front of their path. The impact threw
him onto their windshield then dumped him onto the grassy median.
The officer ended up being air-lifted to the hospital.
This retired couple is still waiting to see if charges are going to
be brought against them. And they most likely will. Their lives
changed dramatically that instant, something they couldn't have
foreseen. Imagine how you'd feel if that happened to you!
They could easily end up spending tens of thousands of dollars in
legal fees. This is just one of many true examples that illustrate
why free and complete access to your money is critical.
The third risk is Flexibility Risk. This is closely related to
control and access risk. Basically, since it's your money you should
have the flexibility to do whatever you want with it. You should be
able to make changes to the way that it's invested. You should be
able to move it from one place to another without having to pay a
penalty. You should be able to pull it out and use it to help a
loved one or just to take that dream vacation. But flexibility is
just one more thing you lose when you buy a packaged product.
These three risks are difficult to place a dollar value on until you
are affected by them. Then they are priceless.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. Find all
his articles at
www.guardingyourwealth.com. |
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