This site is best viewed using Mozilla Firefox browser.

X

Investments

Jerry Jones

2008-10-01 15:56:00

I’m going to turn 65 next year. What should I know about Medicare Supplement or Medigap Insurance?

The first thing you should know is that there are limits to what Medicare Part A hospital coverage and Part B physician’s services and supplies coverage will pay for, so it really makes sense to purchase a good Medicare Supplement insurance policy. Both Medicare Part A and Part B have deductible and coinsurance features that, without Medicare Supplement insurance, are the patient’s responsibility. The Medicare deductible is $1,024.00. After that, Medicare pays 100% of the first 60 days of hospitalization during your lifetime and then all but $256 per day from 61-90 days and all but $512 per day up to 150 days. Everything after that is the patient’s responsibility. Medicare Part A only pays for the first 20 days of skilled nursing facility care and then all but $128 for the next 80 days. A Medicare Supplement policy can pay the difference up to the 100th day. You should know that Medicare Supplement insurance will not pay for skilled nursing care after that and should not be considered a substitute for a good long-term care insurance policy. For Physician’s services under Part B, patients are responsible for the $135 deductible and 20% of the costs up to a certain limit. A Medicare Supplement policy can pay the deductible plus the coinsurance and as much as 100% of the costs of Medicare eligible or Excess Benefits up to the Medicare limit. Persons who are both 65 and enrolled in Medicare Part B are eligible for open enrollment in a Medicare Supplement policy which means that an insurance company can’t refuse your application for medical reasons during that period. There are other situations where persons have the right to purchase a policy. These are called guaranteed issue and usually cover periods when a person is moving from one plan to another. For more information go to www.medicare.gov.

X

Investments

Jerry Jones

2008-10-01 08:48:00

Everyone tells me that I should avoid having my estate go through probate at all costs. Is that the case?

I may be committing an act of heresy, but, in spite of all the horror stories and warnings of dire consequences to those that would actually dare to use the probate process to transfer an estate to one’s heirs, I am not convinced that probate is as evil as people say. Probate is the court supervised transfer of a person’s property to their heirs. Not all property is subject to transfer by probate, life insurance benefits and other property that has beneficiary designations like IRAs and 401(k) accounts change ownership upon death without the necessity of any official act by a court. Bank accounts and real estate can also have transfer on death status assigned to them. A person’s probate estate consists only of property that is owned without any such transfer designation.What probate does do is provide a means to insure that whoever is entrusted with the duty to administer a person’s estate fulfills their obligations as directed. It is also a place where creditors’ claims against an estate and disputes among heirs can be resolved and, sometimes, extinguished. Probate can take a long time, but that’s usually because a person left their affairs in such disarray or the choice of executor was so poor that delays are inevitable. So what’s all the fuss? My suspicion is that those that make their living promoting living trusts want everyone to believe that their method is better. In some cases it is. But, before you accept an invitation to attend the next living trust seminar, have an experienced estate planning attorney conduct a thorough review of the property you own. I’d be surprised if you can’t accomplish your goals efficiently and at a reasonable price without a trust. If you’re craving rubber chicken, go to the seminar.

X

Investments

Jerry Jones

2008-08-01 09:35:00

Can someone please help me understand/define the accreditations and designations that are associated with a financial advisor’s name?

It is an understatement to say that, in the world of financial advice, the myriad of different accreditations and designations that appear after a financial advisor’s name can be confusing. The American College, one of the leading offerers of financial services education, listed twelve separate programs of study in its 2008 curriculum. Investment News reported in 2006 that as many as 100 certifications can be obtained from different financial planning groups. The Financial Industry Regulatory Authority (FINRA) website at www.finra.org/index.htm has a section titled “Understanding Professional Designations” that lists eighty-five certifications, all with varying degrees of requirements necessary to obtain each mark. The site provides information about each designation including the name of the sponsoring organization, the experience, educational and examination requirements necessary or not necessary to obtain the designation. The site also lists whether there is an investor complaint and discipline process and whether you can check a person’s status online. If there is one set of letters you want to see after an advisor’s name, it has to be CFP®. First, the requirements that a person must meet before they can use the CFP® marks are quite stringent. The CFP Board of Standards, which owns and oversees the use of the designation, requires CFP applicants to complete a comprehensive course of study followed by successful completion of a comprehensive two-day 10-hour CFP Certification Examination. The study and the exam cover a wide area of subjects including the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance. Once a person is awarded the right to call him or herself a CFP® Practitioner, they must meet requirements for continuing education, comply with the CFP Board’s Code of Ethics and adhere to standards of the financial planning profession set by the Board. So, even if you don’t quite know what the letters after an advisor’s name stands for, if you see the letters CFP®, you can have some confidence that the person will be someone that you would want to do business with.

X

Investments

Jerry Jones

2008-08-01 09:35:00

I bought some life insurance policies many years ago and the agents who sold them to me are nowhere to be found, should my policies be reviewed? Where can I go for this?

It is a common story that I hear from many clients. They bought life insurance a long time ago from an agent or agents that are no longer in the business and the owners of the policies don’t know where to turn for help. If that’s the case, you don’t need your old agent to help you. Many advisors that offer life insurance are independent and should be able to help you. If you bought life insurance more than ten to fifteen years ago you should have your policies reviewed. Changes in assumptions insurers use to fix insurance rates have caused the cost of life insurance to go down. If you are paying premiums on a policy you bought more than ten years ago, you might be able to get a better rate. If your health has improved, for example you quit smoking, you should look into replacing old policies. Medical advances and new understanding of old diseases has led to changes in insurers’ underwriting practices. Another reason to review your life insurance is that, over time, your needs change. The reason you bought insurance ten years ago may no longer exist. On the other hand, something may have happened since then to cause you to need more coverage. Take some time to assess your current situation and decide whether your current coverage is meeting your needs. Finally, insurance products change. In addition to reduced cost, insurance companies are frequently modifying the features and benefits of policies to meet the perceived needs of the market. The policy you have may not be as attractive as the ones insurers are offering today. Long Term Care Update: The state of Kansas has initiated a Long –Term Care Partnership program that allows purchasers of qualified Long-Term Care policies to protect assets, dollar for dollar, from the Medicaid eligibility spend down requirements. Every dollar paid from a “Partnership Policy” shields the same amount of your assets that you can spend or pass on to your heirs even if your long term care benefits are exhausted. The policies must meet requirements set by the state to qualify.

X

Investments

Jerry Jones

2008-07-01 15:11:00

With all the gyrations of the financial markets, what can I do to help insure that I’m doing the right things with my investments.

These are certainly confusing, if not difficult times for many investors. However, uncertainty has always been a part of investing. The problems just seem magnified now. You might want to take this opportunity to remember some of the basic principals that can help us in good times and in bad. Here are a few: Keep saving. If you are still in the accumulation phase of your investing a life, don’t quit saving now. Investment returns are meaningless if the rate we save is not adequate to build a nest egg to live on during retirement. Investing on a regular basis, will help smooth out the bumps in the road because you will be buying when prices are down and up. Asset Allocation is Key. Since Brinson, Singer & Beebower published their 1991 study “Determinants of Portfolio Performance” it has generally been accepted that portfolio asset allocation is the most important long-term determinant of investment results. Compared to market timing and stock selection, asset allocation accounts for over 90% of a portfolio’s investment results. Review your goals, risk tolerance and time horizon. It’s wise to consider asset allocation in light of a person’s goals, risk tolerance and time horizon. Take the time to reconsider these things and see that your investments fit. Be diversified. In my opinion, properly diversified portfolio should be spread across a broad group of asset classes. The reason is correlation. A portfolio made up of investments that all rise and fall with each other is not diversified and is more volatile. Consider investments that tend to zig when others zag. This will reduce volatility. A current example would be commodities. Real estate and timber are asset classes that add diversification. Another, believe it or not, is life insurance. Consider Taxes. Try to consider the tax implications of your financial decisions. It’s usually better to defer paying taxes to a later date. This isn’t always true. Sometimes a Roth IRA is preferable to a Traditional IRA. Talk about it with your tax advisor or Certified Financial Planner ™ Professional. Protect your assets. Consider using long term care insurance to pay for nursing home care. Other insurance options may allow you to reduce the risk of outliving your assets or pay the costs associated transferring your estate to your heirs. Live well now. Who cares how wealthy you are if you’re miserable or your health is so bad you can’t enjoy life. Consider changes to your life, health and relationships that will increase happiness and the enjoyment of the things you have tangible and intangible.

X

Investments

Jerry Jones

2008-06-01 13:45:00

Question: Can charitable giving help reduce both estate and income taxes?

Answer: The short answer is yes. The long answer is a little more involved because, for those who are charitably inclined, there are a multitude of ways to transfer your assets to charity and receive favorable income and estate tax treatment, all without jeopardizing your or your family’s needs. You should first know that many methods of charitable transfers can be extremely complex. It is essential the lawyers, accountants and other professionals you employ to help you carry out your charitable intentions be experienced at navigating the dangers. The good news is that many philanthropic organizations that rely on gifts from the public have their own set of “planned giving” advisors available to review your plan and give direction about the best way to accomplish your charitable goals. The following is a brief outline of the various types of gifts a person can make and the restrictions and benefits that come from them. Before making a substantial gift, you should always consult with your estate planning lawyer, tax advisor and CERTIFIED FINANCIAL PLANNER™ Professional. Lifetime gifts: Gifts made during lifetime should be deductible from income tax. The income tax deduction for charitable contributions in any tax year is limited to a percentage of the taxpayer’s adjusted gross income (50%, 30% or 20%) depending on the type of property donated and the kind of organization to whom the gift is made. Unused deductions may be carried forward into future tax years. A donation of tangible personal property during life can result in a deduction of the item’s cost basis. There is an exception for donations of property related to the charity’s exempt purpose, which would permit a fair market value deduction. Donations of some kinds of property are better suited for charitable gifts. Particularly, highly appreciated property like securities, collectibles and real estate, because, once in the hands of the charity, the sale of the asset is usually not subject to capital gains tax. Gifts made after death: Qualifying charitable gifts made by an estate are entitled to and estate tax deduction equal to the gift’s fair market value at the time of death. Gifts with Retained Interests: Quite often, when charitable gifts are made during a person’s lifetime, the donor may retain an interest in which income is paid to the donor during his or her lifetime. These arrangements can be established as charitable remainder trusts and can be structured in many ways. The donor receives a partial income tax deduction based on the present value of the remainder interest. The property transferred will not be included in the donor’s gross estate after death and, therefore, not subject to estate tax. Individual Retirement Accounts: Currently, IRA owners over 70½ may make distributions of up to $100,000 of IRA assets and receive a charitable deduction. IRA owners under 70 ½ would first have to make a taxable distribution to themselves before making a charitable contribution. Because of the income tax deduction limits, the IRA owner would have to pay taxes on part of the distribution. There is legislation pending, called the Public Good IRA Rollover Act that would allow direct transfers from an individual’s IRA to a qualifying charity. The law does not permit a charitable deduction, but such a transfer would not result in taxable income for the donor. Real Estate: Like other kinds of appreciated property, gifts of real property to qualified charities may avoid capital gains tax when sold by the charity. A gift of a remainder interest should entitle the donor to a charitable income tax deduction. Donors should know that transfers of income producing property to charities or charitable trusts can result in taxation to the charity or trust on the unrelated business income of the property. Most charities will want to be able to sell the property as soon as possible to avoid the tax and because they aren’t equipped to be able to manage the property. As you can see, charitable giving can be an effective way to reduce income and estate taxes. Before considering it, you should have a genuine charitable intent. And again, don’t take any steps without first consulting with your estate planning lawyer, tax advisor and CERTIFIED FINANCIAL PLANNER™ Professional.

X

Investments

J Richard Coe

2003-05-01 12:39:00

:  What is a "junk bond"?

ANSWER:  Think of a bond as an "IOU".  A bond is a loan.  A corporation, an organization, or a government can issue (or sell) bonds.  When this happens, the corporation, organization, or government is borrowing money from somebody.     If you buy the bond, the money is owed to you.     Would you rather have a bond that pays 6% or 12%?  The best answer is "It depends."  It depends on who issued the bond and how much risk you are willing to assume.  There would probably be a much greater likelihood of default with the 12% bond.     You have probably heard of Moody's and Standard & Poor's.  Among other things, they evaluate the quality of bonds.  If the bonds are considered low to medium risk, they are considered "investment grade".  If the bonds are regarded as higher risk they are considered "speculative grade" or "junk bonds".  With Standard & Poor's, BBB or better is considered "investment grade" and BB or worse is considered "junk".   With Moody's, Baa is considered "investment grade" and Ba or worse is considered "junk".     Are "junk bonds" really junk?  Once again, it depends.  Some "junk bonds" are wonderful investments and some "junk bonds" turn out to be worthless.  They are called "junk" because there is more risk.  That risk may reward investors with higher returns, or it may result in losses for investors.     "Junk bonds" can be further categorized as "fallen angels" or "rising stars".  "Fallen angels" refer to bonds that had once been investment grade.  Because of a decline in the credit worthiness of the bond issuing company, the bonds deteriorated to "junk" status.  Let me provide a personal illustration.  Pan American World Airways was once a fine airline.  In 1990 their bonds were considered "junk bonds".  For $385 each, I purchased bonds with a coupon of 13.5% (yield of 35% on my investment).  At maturity Pan Am was obligated to pay $1,000 for each $385 I invested.  While I knew the bonds were very high risk, I hoped I would get a few interest payments, even if I never got the $1,000 at maturity.  But these "fallen angels" were truly "junk" and my investment was a total loss.     "Rising stars" refer to bonds of companies that may be growing or improving in credit worthiness, but are not yet "investment grade".  I will use another personal example.  Before MCI became a tremendous success story (and long before it's ultimate fall), in 1983 I purchased MCI bonds with a coupon of 14 1/8%.  I paid $983 per bond and received the interest and later sold the bonds for $1,000.  While the Pan Am bond purchase was a loss, the MCI bond purchase was a success.  So some "junk bonds" are better than other "junk bonds".In the last year the Merrill Lynch "High-yield corporates" index reached almost 14%.  Recently it has been as low as 10.14%.  Bond prices go up as bond yields go down.  In the first quarter of 2003 "junk bond" funds have outperformed most asset classes with a return of approximately 5.6%.   About $10.5 billion went into "junk bond" funds in the first quarter of this year.  With 10 year treasuries yielding less than 4% and 30 year treasuries yielding less than 5%, the attractiveness of "junk bonds" is easy to understand.     Professional advice and/or management is highly recommended with junk bonds.  There can be liquidity issues as well as credit issues.  In other words, it might be easier to buy the bonds than to sell them.  Suitability is another important consideration.  Even if a "junk bond" looks attractive, it has to be right for your circumstances and goals for it to be appropriate for you.

X

Investments

J Richard Coe

2003-02-01 15:30:00

:  I have heard it said that most businesses are financed through either debt or equity.  What does that mean?  What is best?

ANSWER:  It is true that businesses are financed through either debt or equity.  Think of debt as an obligation -- somebody owes someone something.  Think of equity as ownership.Let's start with a personal example.  Anytime you purchase something, you pay for it with your money (equity) or with debt  (you owe someone).  You can purchase a car for cash or borrow to finance it.  When people purchase a home, it is typically a combination of equity financing (down payment) and debt (the mortgage).Conceptually, it is the same with a business.  Anytime a business purchases anything, it will either use its own money (equity) or someone else's money (debt or liabilities).  The right hand side of the balance sheet shows how a business has been financed.  Accounts payable, short term borrowings, and long term debt are examples of liabilities.  Instead of borrowing, a small business could raise money by selling an ownership interest (equity) to a willing buyer.  Similarly, if a corporation issues (sells) stock, ownership interests are being sold.  The business gets cash and the investors get stock, which is evidence of ownership.  Small and large businesses are also financed in part through retained earnings, which is another form of equity financing.  Specifically, earnings are retained in the business rather than paid out as dividends.As to whether it is better for a business to be financed through debt or equity, it is helpful to remember that most businesses are financed by both.  Some businesses will have a choice in whether to get new financing by debt or equity, but many businesses will find choices constrained by financial market realities.We can make some generalizations.  Whether we are speaking of debt or equity, both are forms of capital and there is always a cost of capital.   For a given business debt will be less expensive than equity, but the business will probably have to have a certain amount of equity before it can get much credit (i.e. finance much through debt).If a company gets into financial trouble, the debt holders come ahead of the stockholders.  Since there is always more risk with stocks, the only reason for investors to purchase stocks rather than bonds is the potential for a higher expected return.  As of January 31, 2003 an investor could purchase AT&T bonds with yields ranging from 5.5% to 8.6%, depending on the maturity.  Alternatively, an investor could purchase AT&T stock.  A prudent investor would not purchase AT&T stock unless he expected the return to be higher than the return on their bonds, because there is always more risk with the stock.U.S. tax laws have favored debt, because the interest on the debt is a deductible business expense.  By contrast, dividends on stock are not deductible and are taxable to the investor.  President Bush has proposed to eliminate the taxation of dividends on stock.  If the taxation of dividends is eliminated, corporations will not have as much incentive to rely as heavily on debt financing as they have in the past.  On the other hand, corporations will have additional incentive to pay out dividends instead of retaining that cash in the business.  To the extent earnings are not retained, the business will need to be financed in a different way. Some have wondered why the Bush administration did not propose a deduction for dividends (similar to the deduction for interest) instead of proposing the elimination of taxes on dividends received.  Perhaps the best answer for this is conceptual.  Interest expense is a legitimate business expense, a cost of doing business.  Dividends, by contrast, are simply a return of what already belongs to the owners (stockholders).  Dividends are not a cost of doing business and should not be deductible as a business expense.American business will continue to be financed by a combination of debt and equity, but the mix may change if the Bush proposal becomes law.

X

Investments

J Richard Coe

2002-12-01 11:12:00

:  Can you explain why some stocks split and some do a reverse split?

ANSWER:  Would you rather purchase 10 shares of stock at $500 each, 100 shares at $50 each, 1,000 shares at $5, or 10,000 shares at 50 cents each?  Your investment would be the same in each case -- $5,000.  Many people would consider the $500 stock too expensive.  Stock selling at 50 cents (which are considered penny/low-priced stocks) would often ring alarm bells, and some people would have less comfort buying a stock at $5 than $50.Assume the market value of a company is $500 million.  If one person owned the company, it would not make any difference if 100% ownership was represented by one share or 500 million shares.  The one share could be split or there could be a reverse split on the 500 million shares.Assuming there was only 1 share of stock, it would be worth $500 million.  If the owner wanted to sell half the company, he could do a 2:1 split and sell one share for $250 million.  Is the company worth more after the split?  No.If the two owners wanted to sell their stock to the public they might sell 10 million shares through a public offering at $50 for a total of $500 million.  Or perhaps they would sell 20 million shares at $25 for a total of $500 million or 50 million shares at $10 per share for a total of $500 million.  The value of the company is the same, regardless of the number of shares.Would you rather have a dime or two nickels?  Would you rather have a pizza cut in halves, quarters, or eighths?Just as a cut pizza may be more convenient than a whole one, $50 share prices may be more convenient than $500 share prices.  Directors of publicly owned companies often decide to split their stock so that the price will be in a range that seems reasonable.  Stocks split because of growth in the stock price.  Stock splits do not make a company worth more.Stock splits may facilitate liquidity in the market since more people may own shares.  There may be a tighter spread between the bid and ask as a result of a split.  Perceptions matter, and there is something of a "hype" factor with stock splits.  Usually splits are announced when the stock is going up and it is conceivable that the announcement reinforces positive views of the company even though the split itself does not change the value of the company.If a person had purchased 100 shares of Microsoft at the public offering price of $21 on March 13, 1986 and retained them, he would have 14,400 shares on December 13, 2002 through 8 stock splits.  The original investment of $2,100 would have grown to $756,000.Recently another prominent company has been in the news because of a reverse split.  AT&T's Board of Directors decided on a 1 for 5 reverse split, effective November 19, 2002.  Because of the reverse split (which was coupled with a cash dividend) AT&T has 20% of the shares it did before the split.  Those shares (with a December 13, 2002 price of $27.56), are worth 5 times as much as they would have been in the absence of the reverse split. The split or reverse split will probably reflect what has happened to the company.  It is best to think of the split or the reverse split as a symptom, not as a cause.

X

Investments

J Richard Coe

2002-11-01 15:46:00

: What are the Advantages of Exchange Traded Funds?

ANSWER:  An Exchange Traded Fund (ETF) is a basket of securities that tracks an index and is listed on an exchange.  They are similar to index mutual funds in that they mirror an index, but they trade like stocks.Before addressing the features of Exchange Traded Funds, let's review some of the advantages and disadvantages of mutual funds.  Mutual funds have been an extremely popular investment vehicle for numerous reasons including: 1 ) diversification for small investments, 2) professional management, 3) liquidity,  and 4) abundant public information and track record. Moving to some of the disadvantages of mutual funds, we will start with taxes.  IRS 1099 Income forms can have a major impact on the approximately 90 million Americans who invest in taxable mutual funds.  The most recent good year for the stock market was 1999.  Morningstar data, using 3 year annualized rates of returns, for the 5 largest mutual funds as of 9/30/99, showed the tax adjusted returns ranged from 69% to 81% of pre tax returns.Most mutual funds are not managed with tax sensitivity.  Often the funds are owned inside IRAs and 401(k)s and taxes are not an issue until money is withdrawn.  But when owned in taxable accounts, taxes can be very significant.  According to a study by KPMG LLP, the difference between the pre-tax and after-tax return of the typical mutual fund is more than 2%.Between 1994 and 1999 investors in diversified U.S. stock funds lost, on average, 15% of their annual gains to taxes.  The mutual fund capital gain problem is not limited to good stock market years.  Mutual fund capital gains distributions in 2000 (not a good stock market year) of $326 billion exceeded the 1999 (a very good year for the stock market) distributions of $238 billion.  Even in 2001 (a poor stock market year) there were mutual fund capital gains distributions of $72 billion.Another significant disadvantage of mutual funds is the high internal expenses.  For actively managed large cap funds the average expense ratio is 141 basis points (1.41%) and for large cap index funds the average expense ratio is 61 basis points (.61%).End of the day pricing is another negative feature of open-ended mutual funds.  If the market is plummeting early in the day and you want out, you can make the liquidation call but your fund is liquidated at the end of the day prices.  Similarly, you could place an order to invest in a mutual fund early in the day and prices might soar during the day and you have to pay the higher, end-of-the day price.  Would you purchase a house or a car at unknown end-of-the day prices?Of course mutual funds fluctuate in value and involve risk, as do ETFs.  Both mutual funds and ETFs are investment companies registered under the Investment Company Act of 1940.  Some ETFs are structured as open-end investment companies and some are structured as unit investment trusts.ETFs which mirror stock indexes have soared in popularity in the last few years.  They have been so successful that ETFs which mirror fixed income indexes were introduced in the summer of 2002.  Why do I predict continued success for ETFs ?  They are tax efficient, have low internal charges, and other advantages.  While income dividends will still be paid, there are minimal capital gains distributions from ETFs.  They are far more tax efficient than actively managed funds, and even more tax efficient than passive (index) mutual funds.  Barclays Global Investors Services is one of the largest Exchange Traded Fund sponsors.  Their products are called iShares and there were no capital gains distributions on any domestic iShares in 2001.When investors get out of mutual funds, shares are redeemed.  Cash has to be paid out, so securities have to be sold.  Often this results in capital gains.  By contrast, when investors get out of ETFs, they are sold on the exchange and another party is buying.  There is no forced liquidation.  If there is a need for either more or less units of ETFs, institutions handle this by creating or redeeming "creation units" of ETFs.  The institutions do this with "in kind" exchanges of large amounts of securities.The internal expenses of ETFs are dramatically lower than actively managed mutual funds and even lower than index mutual funds.  Many of the ETFs have expense ratios of 20 or 25 basis points (.20% or .25%).  Since ETFs trade like a stock, you can buy or sell at specific prices and you can learn the price of a market order right away.  They can be sold short and bought on margin.  Since ETFs  are subject to commissions for buys and sells, they may not be cost effective for smaller investments.  Like mutual funds, ETFs are sold only by prospectus.As you can see from the chart below, North American Exchange Traded Funds assets have jumped from $23.4 billion at the end of 1999 to $87.7 billion at the end of 2001.Source: Amex and Barclays Global Investing, 2002

X

Investments

J Richard Coe

2002-09-01 10:07:00

:  How should one approach the risk of an investment?

J. Richard Coe Question:  How should one approach the risk of an investment? Answer:  How much investment risk should you assume?  Should your emotions and feelings drive the answer to that question?  Is there a more reliable approach than one's feelings?Most people are risk averse, and for good reason.  Why assume any investment risk?  The only reason to incur investment risk is the possibility of gain.If someone can reach all of their financial goals without taking investment risk that is a wise course of action.  The key word is "all".  Most people cannot reach all of their financial goals without investment risk.  They want more of something, so are willing to incur some risk to get it.  Most people have to assume investment risk to realize even their primary financial goals, let alone all of their goals.In the 1980's I had the impression that millions of Americans were not taking enough investment risk.  Due to apparently attractive interest rates, much money was in short- term instruments.  While short- term rates looked attractive, rates dropped during the decade and people could have made more money in stocks.In the late 1990's many took too much risk.  Stocks climbed higher and higher year after year.  It looked so easy to make money in stocks.  Time-tested principles of diversification were abandoned as many simply joined the technological bandwagon.  Many investors in the '90s had not seen a bear market.They have now seen a bear market of historic proportions.  As the pain became more intense, many belatedly reduced their risk.  In effect they said, "I can't handle this any more."There are different types of risk.  Some risk is prudent; other risk is foolish.  For example, it can be prudent to invest in a diversified equity portfolio, either through individual stocks or funds.  But it is almost always foolish to invest a significant portion of your assets in one stock.There are not many true principles of finance, but the wisdom of diversification is truly a principle of finance.  The old adage is true - we should not put all of our eggs in one basket.  Finance theory can get technical, but it is very helpful to get a handle on the basics.  Simply put, there are two types of risk with stocks.  There is the risk that you get paid for and the risk that you don't get paid for.  Within the world of publicly traded stocks, it is not realistic to expect a return to be associated with risk that can be diversified away.  With each stock there is a market risk (this is inevitable and is the kind of risk that is linked with return).  With each stock there is individual security risk (this can be diversified away by buying other stocks so there is no return expected for this type of risk).If you buy only one stock, you may either make money or lose money.  But you are assuming far more risk than necessary for the return that can reasonably be expected.  On average, if you have only one stock you have more than 3 times the risk of a diversified portfolio.  And what do you get for the extra risk?  Probably nothing.  The stock may go up or down, but you should not expect to be rewarded for the extra risk you have taken.To the extent you take investment risk, you want to be sure it is prudent risk that has the potential for return.  Millions of Americans have lost much of their net worth because they had invested heavily in only one stock such as Enron or WorldCom.  Those losses are probably permanent.  By contrast, people with diversified portfolios have also experienced losses, but there is still potential for market rebounds.  Markets go up and down.  If someone has a diversified portfolio and has the patience to live through the downturns and wait for the rebounds, the losses are only temporary and not "realized".While we should only have "prudent" risk, there is still the question of how much of it we should have.  Investor feelings do matter.  Behavior is important.  If someone will be inclined to liquidate simply because the stock market has dropped, it would be better for that person not to have invested in stocks in the first place, even if it was diversified, "prudent" risk.Many advisors use simple questionnaires to get a handle on someone's willingness to incur risk.  At least one independent online company offers a statistically valid 25 question multiple-choice questionnaire to measure one's willingness to assume risk.While it is very helpful to get an accurate read on risk tolerance, another dimension is even more important and it has nothing to do with emotions or feelings.  Tools are available that simulate 1,000 or more lifetimes with different life expectancies and a wide variety of rate of return assumptions.  The success of one's financial plan depends largely on how long someone will live and what rates of return are realized. Both expectancy and future rates of return are unknowns and can vary greatly.  Through simulation of 1,000 lifetimes it is possible to get a probability analysis.  This tool can be very helpful in determining the amount of investment risk one should have.  For example, the probability analysis might show that someone had a 45% probability of meeting their goals with a 40% equity exposure and a 63% probability of success with a 60% equity exposure.  That would be a good reason to consider increased equity exposure even if one did not feel comfortable with the idea.Too much risk can be detrimental and too little can cause one to fall short of goals.In summary, a wise investor will eliminate unnecessary risk through diversification.  A wise investor will take no more risk than necessary to meet his or her goals.  A wise investor will have an accurate read on one's willingness to assume risk.  A wise investor will decide how much risk to incur in the context of specific goals.  Probability analysis can be used to determine an allocation to improve the odds of meeting important goals.