SMI on the Radio: The Risk of Playing It Too Safe as an Investor (audio & transcript)

Apr 17, 2024
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As an investor, you want to avoid taking too much risk and too little.

SMI's Mark Biller explained why on yesterday's Faith & Finance program.

To listen, click the play button below. Scroll down for the transcript.

Faith & Finance with host Rob West airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.

(For more radio appearances by members of the SMI team, visit our Resources page.)


Rob West:
Economist and investment expert Peter Bernstein once said, "The biggest risk is not knowing what you're doing!"

Mark Biller joins us today to talk about managing investment risk.

This is Faith & Finance on American Family Radio, biblical wisdom for your financial decisions. (theme music ends)

Well, our guest is Mark Biller, executive editor at Sound Mind Investing, where they always know what they're doing! SMI is also an underwriter of this program. And Mark, it's great to have you back.

Mark Biller:
Thanks, Rob. Good to be back with you.

Rob West:
So Mark, the new issue of the SMI newsletter has a focus on risk management — and one of the articles, as you know, that we'll discuss today is The Risk of Playing it Too Safe. Now, that sounds like a contradiction in terms, so maybe you could start by explaining it for us.

Mark Biller:
Yeah, absolutely. It does seem like a little bit of a riddle, but I think the best way to make sense of it, Rob, is by digging into a behavioral phenomenon that the experts call "loss aversion."

Researchers have found that most people feel the pain of losing money roughly twice as strongly as they feel the joy of gaining money. Let me say that again a little bit differently, just so everybody gets it really clearly: Losses feel roughly twice as bad as gains feel good.

And so that naturally causes a lot of people to become loss-averse and they try really hard to avoid losses. Sometimes people take that to such a strong degree that it actually undermines their long-term goals.

So one of the trickiest parts of investing is we need to take enough risks so that we meet our long-term goals without taking more risk than you need to.

And there's some really tangible steps that we can take to reduce or mitigate risk. A lot of those are the things that we talk about frequently on FaithFi. These are things like maintaining an emergency savings fund to minimize the risk of a financial emergency when it comes to investing. Diversifying your holdings rather than putting all your eggs in one basket is another good example of how we can take tangible steps to reduce our risk.

Rob West:
But as you point out in the article, it's also possible for a person to be too risk-averse.

Mark Biller:
Yeah, that's absolutely right. And sometimes we actually increase our long-term risk by playing it too safe with our investing decisions. One example of that is young people not investing aggressively enough, and by doing that, they let the opportunity for long-term compounding to slip away.

Now, this one's kind of ironic because young people — we often stereotype them as inherently bold risk-takers. We these stories in the newspaper or whatever about them buying meme stocks and Bitcoin and doing other really risky investing things, and certainly some of them do. But the broad research on Generation Z — that's adults age 27 or younger — really does not back up that perception. So the article we're talking about today discusses a recent national study that found these Gen Zers are the least financially confident generation.

57% of them think that savings accounts are the best way to invest their money. And as you know, Rob, most financial pros would agree that savings accounts are just a really extremely conservative choice for people with several decades of investing time ahead of them.

And even when we go up the next step of the age demographic ladder to the millennials, that's people age 28 to 43, they're also surprisingly risk-averse. A different Schwab study last year found that millennials were especially interested in bonds. Well, again, bonds have historically been the favorite of retirees, not 28-to-43-year-olds.

So what these surveys indicate is that younger investors are arguably too loss-averse today, and they're making investing choices that are likely to significantly impair their ability to build long-term wealth as a result.

Rob West:
That's surprising. And maybe it comes down to younger folks just having less experience with how investments work over time. They're not seeing what can happen down the road. Would you think that's it?

Mark Biller:
Yeah, I do think that's right, Rob. I would also point out, though, that previous generations didn't have that same conservative inclination when they were younger and when they were less experienced investors. So, I do think there's something else going on here.

But you're exactly right that there's a disconnect between making a safe 5% return in a savings account or a bond today and not recognizing the impact that inflation is likely to have on that relatively low rate of return over time. And the reason young people should be targeting that higher return of stocks over these many decades that they're saving for retirement is so that they can grow the purchasing power of their savings at a faster rate than inflation over the course of their careers.

Rob West:
Yeah, interesting. And unfortunately, that disconnect, if you will, isn't limited to young people. Is it? Tell us about the new retiree that you talk about in the article.

Mark Biller:
Yeah, it's exactly right, Rob. Retirees often fall into the same trap. So the article talks about a particular 65-year-old new retiree who recently contacted us. They have all their retirement savings and cash, and this retiree told us that she could live just fine on social security plus the $450 that she was taking out of her retirement savings each month.

So, of course, we asked her, well, how long will your savings last if you keep taking out $450 a month? And to her credit, she knew that answer immediately. She could do that for a little over 25 years. So she felt pretty good. She had run the numbers, she thought she was in good shape. But the reality is she really isn't in great shape because she was failing to factor in this rising cost of living and because of inflation's corrosive power.

I mean, we've seen this in the last three or four years firsthand how $450 today is going to buy far less in the future than it does right now, and that means that this retiree standard of living is unfortunately just going to decline steadily as the years pass. So this is a case where an investor doesn't want to take any risk, but ironically, by playing it so safe, she's not just risking the possibility of financial trouble down the road. She's basically guaranteeing it if she stays on that ultra-conservative path.

Rob West:
Yeah, that's a really helpful example.

All right, so for our listeners today, Mark, how do they prevent this from happening?

Mark Biller:
Well, to prepare for the future, investors normally need to accept some degree of risk. That typically means maintaining at least some exposure to stocks even after they reach retirement age. That's simply because these days, a person needs to plan as if their retirement could last 20 or 30 years.

Now admittedly, it is tricky to dial in that "not too much risk but just enough" balance. It is kind of a fine-tuning process, and this is where a good financial advisor or a service like SMI can often really help someone figure out what is that appropriate level of risk and then translate that into a portfolio of stock and bond investments.

Rob, as you know, I'm not a big fan of annuities in most cases, but let's take this case of this new retiree we were just talking about a moment ago. Even an extremely conservative step like buying an annuity with an inflation rider would likely provide that person with a higher monthly income while also locking in at least a little bit of inflation protection. So the point of bringing up that example is there usually are that can be done, but first the person has to recognize this risk of playing it too safe.

Rob West:
Yeah, that's really helpful, Mark. Annuities, of course, tend to be costly, among other issues, and I know they're not my first choice either — although for somebody that wants to transfer that risk to an insurance company, it is an option. But what would you suggest is perhaps a better approach?

Mark Biller:
Yeah. Well, we typically would suggest for SMI investors that really closer to a 50/50 blend of stocks and bonds is still pretty appropriate for most people as they're hitting early retirement age. If the numbers work for a person, a conservative investor like this one that we've been talking about, they might be able to drop that down to 20 to 30% in stock mutual funds or ETFs and putting the rest of that in fixed-income securities. But even there, just keeping that little bit of stock growth exposure is one way to really improve the odds of having enough money in your later years.

Now again, I want to reiterate we don't take on extra risk just to try to grow our pile as much as possible. We need those returns to be higher than inflation in order to protect our purchasing power. For most people, that means taking on some risk. You want to reduce that risk over time. That's why you scale back your stock exposure. And we constantly remind our readers and members don't take on more risk than you need.

But, ironically, recognizing that taking too little risk over the long haul can be as damaging as taking on too much risk. So we've got to weigh the risk of action against the risk of inaction.

Rob West:
Great stuff, Mark. Of course, folks can check out these articles about risk management — and specifically the one we've been discussing today, The Risk of Playing it Too Safe, at

We're nearly out of time. Mark, tie a bow on this for us.

Mark Biller:
Yeah, so I guess the takeaway, Rob, is investment risks certainly needs to be managed. We're not trying to tell people to ignore the risks involved with investing to whatever degree possible, you want to minimize your risk. Nobody gets bonus points for taking on more risk than they need to, but against those truths, we need to balance that by understanding sometimes the riskiest thing to do is to play it too safe. You can't go into the bunker too early and expect your purchasing power to keep up much less grow ahead of inflation over time.

Rob West:
And given inflation and the fact that people are living longer with the advances of modern medicine, that just makes this all the more important. Right?

Mark Biller:
Absolutely, yeah. You've got a plan, like I was saying earlier, even once you hit retirement, that's not the end of the investing game because most people have 20 to 30 years that they've got to make that money continue to last.

Rob West:
Mark, we always appreciate your insights, my friend. Thanks for stopping by today.

Mark Biller:
Always my pleasure, Rob.

Rob West:
That's Mark Biller, executive editor at Sound Mind Investing, an underwriter of this program. Again, check out this article,

I'm Rob West, and this is Faith & Finance at American Family Radio. We'll be right back.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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