Can you be too careful with money?

Dr. John Nestor was a cautious man.

So cautious that the FDA transferred him out of his position as medical officer in the cardio-renal-pulmonary division because he didn’t approve a single new drug in more than four years. His careful disposition blinded him to the risks patient’s faced when new medications weren’t available.

In 1984, Nestor came into more infamy for his one-man crusade against unsafe driving.

He believed the national speed limit of 55 mph saved lives, so he began driving that speed—and not a mile more—in the fast lane of Washington DC’s beltway. He planned to slow other drivers down no matter how many raised fingers and honks came his way.

But his cautious attitude was blinding him once again.

A single slow-moving vehicle in a fast-paced herd was in itself a hazard. He was actually increasing driving risk rather than lowering it.

And this is what some people are doing with their money.

They’re so afraid of losing it that they are John Nestoring their way to increased risk—particularly inflation risk.

Many long-term investors don’t realize they can lose purchasing power when money sits idle in savings and money market accounts.

These accounts make sense when you need liquidity or if you’re saving for something in the short-term like vacation, but as Michelle Garey, CFA, who works as a Trust Investments Officer at Bank of the Ozarks points out, “If you have a longer time horizon, like for a distant retirement, you can take a little more risk in your portfolio.”

This is because of the relationship between risk and return. “Generally the more risk you take,” Garey says, “the higher the investment returns over time.”

Risk tolerance varies for everyone, but “at a minimum, an investor’s goal is to at least earn the rate of inflation.”

There is a risk spectrum that ranges from low-risk investments like U.S. government bonds to slightly more risky corporate bonds, then U.S stocks, then foreign stocks, all the way to highly volatile investments like options, venture capital, and emerging-markets.

When assuming more risk, the key is to avoid making decisions based on short-term portfolio performance.  You need a long-term focus and a diversified portfolio that manages volatility by using a blend of investment types.

Because in the long term, usually a little risk pays off.

Which brings us to the story of risk taker Paul Harvey. In 1951, during the early years of his career, he embarked on an investigative journalism stunt to prove that a nuclear research facility had lax security.

Only it wasn’t as lax as he thought and seconds after climbing the security fence, he was arrested and brought before a grand jury on charges of espionage.

The stunt had not only risked his career, but possibly his freedom.

In his case the risk had a large return because the grand jury decided not to indict him and the FBI contacts he met, including J. Edgar Hoover, eventually gave him the sources and fact-checkers he needed for his future radio broadcasts, including his popular “The Rest of the Story” program.

Which brings us full circle because it was on that radio show that I first heard the story of John Nestor and the pitfalls of being too cautious.

 

Adam Lucas holds a Finance degree and an MBA from the University of Kentucky. His work has appeared in many major outlets including AARP.org and GoBankingRates.com.

 

Michelle Garey, CFA, MBA, is a Senior Vice President & Trust Investment Officer at Bank of the Ozarks.  Contact her at 704-484-6462.

 

 

 

NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION, MAY GO DOWN IN VALUE