On-line Investing, Riskier than Bingo! The Elderly and Financial Risk Taking

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The meek shall inherit the earth, at least if it is not lost to margin calls. In a world full of opportunities comes an equal number of risks. On-line investing has brought Wall Street into the study, kitchen, living room, or where an investor wishes to trade. For the elderly, this can be a problem. While many may think of rocking chairs on the porch or shuffle board on a cruise ship, the real retirement for many professionals means trying to manage their investment portfolio to maintain income and growth. For many, that also means taking an active role in this process. This is not Bingo, and due to the very nature of the process, can be much like gambling, addictive and risky.

One of the longest running pieces of financial advice has been carefully carefully managing your investments in terms of a financial triangle. This triangle is made up of varying levels of financial tools or instruments and each layer closer to the top reflects additional risk. This triangle starts with a bottom denoting safe, risk free investments such as treasury obligations or bank certificates of deposit. As the type of investment increases risk, and therefore a potentially greater return or loss on invested capital, the higher on the triangle it goes. General belief is that each level as a percentage of a person's investment portfolio should be adjusted as they get older and closer to retirement to reflect a more conservative, risk adverse position. This is in line with the concept that there are fewer years, or no earning years, left to support the recovery of a financial loss if a risky investment goes bad.

Investment in the stock market, in general, has been very good over the long term. The problem for the typical retired person involved with on-line investing is that they do not have a long term over which to recover short term losses if they occur. In addition, this description of the stock market is just that, the overall stock market, not individual stock issues.

Before you or a loved one decide to "play the market" or be a "day trader", be aware that significant risk is involved. The following are points to note for the elderly investor.

1. The Market goes on forever. The market for a stock can now be beyond the typical stock market day of 9:30 am to 4:00 pm Eastern time. As the markets continue to evolve, there are now markets before the normal market opening and after the market close. If your on-line firm does not participate in these markets, you may be at risk if your stock position trades actively in before or after hour trading due to news on the company while you are on the sidelines. Stocks can trade wildly up or down in these non-market hours.

2. The market can be a terrible mistress. The need to monitor investments can dominate your time if you are in a position that is move sensitive and you are trying to trade the stock for the short term. You can find yourself becoming isolated, not wanting to step away from your computer screen in fear of missing an opportunity, or facing a loss.

3. Losses are real. Most people believe they know when to get in when buying a stock, but it is human nature to hold on to an investment when it is going down in value, hoping and praying that it will return to at least break even. It takes a lot of discipline and the on-going use of stop loss orders to make sure that your emotions do not leave you with a significant loss if the market is "irrational" and goes against your position. Look at the wild fluctuations of a stock like Google, up and down tens of dollars per share each day, with precipitous gains and losses.

4. Big Investments with OPM. Other People's Money, the term often used in real estate investing is also true in the stock market. You can find yourself borrowing in a Margin account and if the investment goes against you, you now may owe money that the firm wants back. You can be forced to sell investments that you made in order to meet the "margin call". It may be very unwisely to take on large margin positions in an account that you are managing your nest egg in as when you sell out of the position to meet the call, the loss is real. You have very short time frames in which to meet the margin call by either selling out of a position, adding additional capital, or additional non-margined securities.

If you or a loved one is considering on-line investing, consider limiting the amount of capital used in this type of investing to a small, say five to ten percent portion of your entitlement investment portfolio. This assures that the other ninety to ninety-five percent is professionally managed and diversified. Look at on-line investing for the elderly as risk capital. There is typically no opportunity for the older on-line investor to build up his or her nest egg once it it lost due to poor investment decisions or an "irrational" market. Even the professionals lose money, other people's money, so recognize the risk of your own investment. Will Rogers once made the comment that he was not interested in the return on his money as he was in the return of his money! This would be a good guide for the elderly on-line investor.