Services are provided in native languages by bilingual attorneys: divorces, local and international, consultations about family matters by top experts, Hague Convention, child support, alimony, adoptions, wills and trusts, legalization of foreign divorces, registration and legalization of foreign documents, apostilles, mid-marriage agreements and prenuptials, restoration of vital documents, all matter related to the United States, former USSR territories, Europe, Israel and Australia.

A LESSON LEARNED ABOUT RISK

January 11, 2009

A New Year resolution that should be on everyone’s list is to gain a better understanding of and appreciation for risk.

RISK IS A NORMAL ASPECT OF LIFE

Robert Frost: “We took risks. We knew we took them. Things have come out against us. We have no cause for complaint.”

Harold Macmillan: “To be alive at all involves some risk?”

We consciously and unconsciously take risks every day. We drive to work not thinking all the time of the likely risk of an accident and remote risk of death. We put the risk aside because driving is a must if we are to get about. We board planes for business trips and vacations assuming the risk flight because we view the hazard as remote and always happening to someone else. Some of these daily risks are born from absolute necessity and some are voluntarily assumed.

Risk is also an element of every investment alternative. Investment risk is directly related to reward. Before the sub-prime crisis many chased performance seeking the highest available rate of return thinking that the return in excess of other available rates was a gift. Many were unaware that they were taken on much greater risk than for lesser returning investments.

General George S. Patton: Take calculated risks. That is quite different from being rash.”

I was speaking with a stock broker a week ago. He said “there isn’t much risk left in the market because it has already fallen so low.” I asked him if he’d considered specific company risk. The risk that a company you hold may go out of business may not be reflected in the averages. Equity value can disappear very quick, e.g., Wachovia.

I visualize investment risk by thinking of a ladder braced at the bottom and pointing straight up in the air. The ground is the so called “risk free” U.S. Treasury rate for a short term, mid-term or long term obligation. Initially, each percentage point above the risk free rate takes you one rung up on the ladder. The higher on the ladder you climb the harder and faster will be the fall. The presence of additional risk factors might take you two or three rungs up the ladder for each percentage point return increase.

Investments with any of these elements add to risk:

1. Has a foreign situs (stocks trading on foreign exchanges);

2. Is an innovative or new investment product lacking a track record such as “managed futures;”

3. Is several steps removed from the original transaction (securitized mortgages);

4. Is complex and not fully understood (derivatives like credit default obligations); or, is purchased through a private money manager (e.g., Bernard Madoff) as opposed to an institutional money manger subject to greater governmental regulation.

5. Is hard to value (securitized mortgages).

RISK DEMANDS ATTENTION

Some other points to keep in mind:

1. Think of the return not as a “rate of return” but as a “rate of attraction.” That is, the rate an issuer must pay to obtain capital from investors having alternative choices. When, for example, the U.S. Treasury offers mid-term notes at 3% and you are offered 15% on a private mid-term investment opportunity, the rate is 15% because investment risk is such that investors will not buy at less than that offered rate. The rate of attraction is a measure of risk.

2. Advisors often question investors about their “risk tolerance.” This is a psychological measure of the degree of risk you can tolerate without losing sleep. They less often consider “risk capacity” or the amount of loss you can handle given your present financial situation, age and health. A 25 year old may be able to make up over time the total loss in a risky investment, a retired 70 year old cannot.

3. Be wary of the geek’s risk models. Wall Street, before the sub-prime mess exploded, lived in a euphoric world of high returns and perceptibly low risk but the low risk evaluation was premised on faulty models. The computer risk models employed considered the most likely risks (those falling in the 99th percentile of the bell curve) but failed to warn of remote catastrophic risks not part of the historical data on which the models were based (included only the prior two years which were bubble years). The programs did not consider that the unexpected (events falling at the ends of the Bell Curve normal distribution) occurs and not just once in a lifetime. Thus, the most dangerous risks are the one’s that computer models never predict because they fall outside of the data base.

WHAT IGNORING RISK HAS WROUGHT

The Federal Reserve now acknowledges that the economy is in worse shape than previously thought.

1. Consumers took a holiday from spending over the holidays. It may turn out to be an extended vacation as staggering job losses can create spiral of even less spending followed by even greater job losses leading to further reductions in spending and so on. As many as 20% of the largest retailers are expected to wind up in bankruptcy. Retailers are resorting to discounting up-front the price of goods just hitting the floor (new merchandise) a very bad sign.

2. December saw another 524,000 jobs lost with the loss for 2008 totaling 2.5 million jobs and no let up from the carnage expected in 2009. The simple unemployment rate grew to 7.2% or using a more complex model, 13.5 percent, taking into account part time workers and discouraged workers not longer seeking employment.

3. December was the worst month for auto sales in 15 years.

4. The beginning of 2009 saw the stock market make a “false hope spurt” which did not last. Judging from the long stretch when P/E ratios were well above the historical average, it should theoretically take an equally long time for present below average ratios to move back to average.

5. The Consumer Confidence Index is at an all time low.

OBAMA TO THE RESCUE

President-elect Obama has now revealed some more details of his fiscal (spending) plan to stimulate the economy:

1. In additional to infrastructure he plans to spend money on education, health and energy. While many economists doubt that infrastructure programs have more than a moderate impact in stimulating growth, such programs at least have a lasting residual value in the structural improvements made to bridges and other public works. The questions:

a. Will politics inject so many frilly pork barrel projects onto the program that the lasting benefit is diluted? Many believe that government is less effective at allocating resources to worthy projects than is the private sector. Others disagree, especially when it comes to necessities of life like health care

b. Will projects be delayed by local and federal squabbling and buracratic red tape?

c. Long range, will the spending produce inflation (not a concern now) that will chase off foreign lenders, mainly China, and ultimately lead to much higher interest rates?

2. Thus, far the government’s effort to exert fiscal policy has been inadequate.

3. Obama has also revealed his intention to seek business tax cuts. I question two of the proposals.

a. Giving businesses a tax credit for new hires will not help the economy. GM will not hire new employees if consumers are not buying GM cars.

b. Allowing corporations to carry back net operating losses 5 years instead of 2 years to recoup prior taxes paid may only give bankruptcy trustees more cash to distribute to creditors if the businesses are not viable.

4. The proposed amendment to the Bankruptcy Reform Act allowing judges to reduce the principal amount of mortgage loans is helpful but bankruptcy being a sometimes long and expensive process, may not help as many as fast as is needed. Moreover, while amending the Act, Congress should repeal the provisions of the Act making it more expensive and difficult for consumer debt to be discharged. As the jobless crisis increases, more consumer debt will go into default. People will need a fresh start, putting aside the moral issue, for the sake of the economy.

5. The Fed will also continue spending up to $600 billion to acquire mortgage loans which hopefully will then be expeditiously modified, as required to help stabilized the real estate and mortgage markets.

6. The Fed and Treasury are looking into ways to provide back up for the $2.7 trillion municipal bond market which local governments now find completely unavailable or too expensive to borrow in.

7. Many are calling for a re-examination of 401(k) plans. These self managed plans took the place of traditional retirement plans. Many now question the Reagan and Bush “ownership society” where individuals are expected to play a bigger role in managing large financial risks such as saving for retirement or paying for health care.

8. Surprisingly, Obama is now getting push back from his own party over the proposed business tax cuts, inserted no doubt, to at least in part mollify republicans. Thus, what the fill rescue spending bill will look like is far from certain.

TAK, SHTO DELAET?

A Russian, faced with an unsolvable problem, will often say, “

“Tak, shto delaet? (So, what’s to do?) My advice for what it is worth:

1. Assess both your risk tolerance and risk capacity.

2. If you want to get back into the market go with broad based index funds, but go slowly.

3. Avoid alternative investments unless you fully understand them and are willing or need to assume the added risks.

4. Avoid the innovative new stars like managed futures. They were created to make money for the inventors and marketers.

5. If you have a low tolerance or capacity for risk, consider laddered CDs or U.S. Treasury obligations.

6. Avoid foreign stocks or bonds. The argument that they do not correlate well with the U.S. markets (and hence spread risk) has been disproved.

7. If you have a money manager, broker or financial advisor, be proactive and question them ad nauseam. Don’t be lead to the wolf like a little lost lamb. It is your money, protect it.

Caveat: I am not a certified financial planner and do not offer advice on specific investments. I offer old common horse sense.

OPT OUT NOTICE: If you’d rather not receive “Steinberg Talks Tax”™ simply send me an e-mail with the word “Remove” and I will promptly remove your name from my distribution list.

© 2009 by Robert S. Steinberg, Esquire, Miami Florida
Articles and consultations authored by attorney reflect the state of law as of the date of their writing. The laws change daily. Users of this site are advised to consult attorney regarding their situation.
russian divorce services Payment by credit card
Divorce
The highest compliment you can pay me is the referral of a friend or a relative.
+1-212-205-2211 New York
+1-212-574-3288 New York (Fax)
+1-617-850-9199 Boston
+1-310-929-8444 Los Angeles
+7-495-662-8721 Moscow
+7-921-946-0582 St.Petersburg
+7-812-309-5697 St.Petersburg (fax)

Divorce in Russia ©

Copyright © 1998-2020

Russian attorney at law Karina Duvall.

Terms and conditions of Russian-Divorce PC

LI