Ed Butowsky on Risks in Investment Portfolios

We often hear discussions about risk but there is no one better to explain it in detail than Ed Butowsky, a 25 year veteran of the financial services business. Butowsky says he shocked at how limited the conversation about risk really is. Most people take on the surface that risk is loss of principal. However, there are many other risks you need to evaluate when organizing an investment portfolio, he says. Below are three examples of various risks.

1. Capital Risk. 

This is the easiest risk to understand. You put $100 in an investment and it drops to $80. Most people are only worried about capital risk so they are falling victim to many other risks in their portfolios that are lesser known.

2. Purchasing Power Risk.

This risk is something that everyone is falling victim to, however, the severity of each case varies. No one is immune to Purchasing Power Risk. Since many people are afraid of capital loss, they have decided to remain in money market earning basically less than 1% on their investments. Cost of living increases are rising dramatically and everybody’s lifestyle is different, however we can generally say that if you are earning 1% on your money, after taxes and the real cost of living increase, you are losing about 6% purchasing power a year. 

3. Correlation Risk. 

Professional money managers have been aware of this problem for years. Most equity categories are going up and down together. If all of your investments rise based on a positive economic condition, they will most likely decline together when that positive economic condition changes. The genius of investing is finding investments that can make you money but don’t have the same risk characteristics of all of your other investments. Everyone needs to know that due to the unrelenting printing of money by the Obama administration, we are seeing more assets rise together than ever before. With money being force fed into the economy due to Obama’s quantitative easing policies, all equity investments have risen together. This presents a major potential risk for all investors. Make sure to compliment your portfolios with investments that can also go up when equity prices go down.

Butowsky recommends that you discuss each of these in detail with your financial advisor immediately.


Ed Butowsky - Can You Blame Bank of America?

As parents, we have all faced a difficult conundrum when we’ve
discovered that our children are being bullied. One one hand, we tell
them not to fight back and lower themselves to the antagonist’s level.
However, sometimes, as I say when someone picks on you, you need come
back harder and beat the s**t out of them.

Most people have similar feelings when it comes to the banking
industry. One one hand, people blame these institutions for doing the
country wrong due to the financial meltdown and excessive consumer
fees. However, it is important to remember that banks are not
non-profit organizations. They are corporations with a responsibility
to make a profit. The fees that they charge are disclosed upfront and
in a free economy such as ours, you have the choice to decide if you
want to do business with them or not.

On the other hand, some people feel sorry for the banks due to
incessant big government oversights and intrusion in their daily
business. Yesterday, Bank of America announced that they would charge
a monthly fee to their customers if they opted not to do business
online. My response is “Can you really blame them?” Bank of America
has been demonized for the last 3 years publicly and financially and
this is simply a defensive move to protect their business.

Although some of criticisms of big banks may be justified, due of all
of the new regulations, “fines and other levies” put on them, they
have no choice but to find a way to make money for their shareholders.
The numerous oversights included in the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 is a devastating blow to the
financial balance sheet of all major banks. Compliance is
extraordinarily expensive and limits their ability to do business as
they have in the past. The Durbin Amendment provisions that became
law in October limits credit card transaction fees for individual
consumers, but places a larger burden on the banks. Banks have no
choice but to accept what the government is placing on them but can
you really blame them for fighting back?

While it is true that many of these laws and regulations protect
banking consumers, the banking industry as a whole still must fight
back in order to stay in business. If you are wondering if you should
blame Bank of America, go ahead, but let the free market run and
appreciate the fact that if you don’t like it, you can always take
your money somewhere else.

Ed Butowsky is an internationally recognized expert in the investment wealth management industry. Butowsky has been in the financial services industry for over 22 years. Ed started his career with Morgan Stanley and was a Senior Vice President in private wealth management. In his 18 years at Morgan Stanley, he was the firm’s top producer nationally as well as the first advisor to surpass one billion dollars in assets under management. He was also recognized as a member of both the Chairman’s Club and the Equity Club, a distinction reserved for only the top advisors at the Morgan Stanley.