Editor's note: John Burdette is a financial adviser at Fourth Avenue Financial in South Charleston. He will answer readers' questions on finance and investing in a monthly column. Contact him through the Daily Mail at busin...@dailymail.com.
Nobody likes to lose money. In fact, psychological studies show the desire to avoid loss is twice as strong as the desire to obtain gain.
This is called "risk aversion," a natural, necessary tendency that helps prevent reckless decision-making.
However, severe risk aversion is beyond natural self-preservation and can be detrimental to your financial future.
I see individuals who have been paralyzed by risk aversion on a daily basis in my financial planning practice. This has led them to unknowingly expose themselves to hidden dangers.
Most accumulated money over time in savings accounts or Certificates of Deposit, thinking these to be the only "safe" way to handle money.
When I tell people it is dangerous to have all of their money in one type of investment, many assume I don't include savings accounts and CDs.
That is not the case. Even these have risks.
The problem is most people define risk only as the safety of principal. In that context, CDs and savings accounts are safe because the principal is FDIC-insured.
However, another big risk lurks: The loss of purchasing power to inflation.
Under current conditions, CDs and savings pay interest of far less than 1 percent. Meanwhile, prices are rising at nearly 2 percent a year.