Excessive Investment Risks: Unknown Unknowns

April 5, 2013by admin0

Little more than ten years and two months ago, Donald Rumsfeld earned the 2003 Foot in Mouth Award, (in)famously explaining the absence of evidence linking the Iraqi government with weapons of mass destruction, by saying,

“There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say, we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.”

If you were using this rationale to describe your retirement plan, where would investment risk fall among those three categories?  For most, dangerously, it is an unknown unknown.

Answer these questions.  If the broader stock market precipitously pulled back 25%, how would your investments react?  How would that affect your plans to retire?  The answers for many would disappoint them.

For a litany of reasons found in my colleagues’ numerous posts and articles, stock markets appear overvalued, precipitously poised to pullback on any number of catalysts, the most plausible of which is reduced earnings guidance in first quarter corporate reporting.

To be blunt, there are people who think they will retire next year, who, if the markets pulled back 25%, would be unable to do so.  If this scares you, it is because it is intended to do so.  Avoiding that fate should involve clarifying how investment risk will impact your eventual retirement timeline and income.

An initial step in LeConte Wealth Management’s financial planning process is a review of the client’s information to uncover any ticking time bombs that could derail their financial goals while the planning process evolves.  Lately, we have uncovered many with elevated portfolio risk.  We ask them, “What would concern you more; missing out on the next 5% upswing in the market, or suffering through an immediate 25% downturn?”  Their answers often lead them to a more conservative approach while their retirement objectives are developed through planning.

Leconte’s planning process seeks to turn “unknown unknowns” into “known knowns”, establishing a deliberate link between how you invest and what you hope to accomplish in retirement.

As Frasier Crane said, “It may be an unwise man who doesn’t learn from his own mistakes, but it’s an absolute idiot that doesn’t learn from other people’s.”  Everyone knows someone who expected to retire in 2009, who, after 2008’s market meltdown, was unable to do so.  Here and now is your chance to potentially avoid a similar fate.

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