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Thinking Out Loud

Confusing Risk with Volatility

What is "risk" really?

Risk is the chance of permanent loss of capital.

Volatiliy is the daily, minute-by-minute, change in prices of stocks, bonds and other financial assets.

During periods of price fluctuation, some gut-wrenchingly so, loss of money does not happen until an action occurs. You sell.

Holding a diversified portfolio of great company stocks has never resulted in loss if you did not react to price volatility and sell.

The trendline for equities has been up and all the declines have been temporary.

The question for individual investors is: How much price fluctuation can you stand before you want to give in to your fear that something that has never happened will happen?


Thinking About Selling Your Business?

Key Actions to Get Full Value

  1. Plan. 
    1. Know when you want to sell.
    2. Know how much you need to walk away with from the sale
    3. Choose the right time to sell, but be prepared to sell anytime.
      1. Vision for business articulated
      2. Audited financials
      3. List of opportunities for business
      4. Environmental review
      5. Documented operational procedures
      6. Evaluate management - right people, right seats
    4. Know what you’ll do with your life after the sale.
    5. Know the value of your business…many do not.
  2. Negotiations – Don’t negotiate with yourself. Get at least two competing offers first and never put a number on the table first. (You will be stuck with it).

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Why Do People Buy Life Insurance?

Our experience shows  that people buy life insurance for these reasons:

  1. To provide replacement income for their family (i.e. provide a pool of money that can earn interest and dividends and pay income for a long time if properly managed)
  2. To pay off debt - e.g. mortgages, home equity loan, college loans, credit card – allows the family to get out of the hole. The financial shock of losing your husband or wife can be devastating.
  3. To pay college expenses for the kids - get them started in life without a debt burden.

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Bond Funds and Interest Rate Risk

One of the primary risks that bond funds hold for investors is interest rate risk.

Bonds increase in price when market interest rates fall. Conversely, bonds (and bond funds) decrease in price (value) when market interest rates rise.

How can you estimate how much the value of a bond fund will rise or fall when market interest rates change?

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