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Caught Between Scylla and Charybdis

Remember the story of Odysseus the Cunning? A clever strategist and inventor of the Trojan Horse, he left the Trojan War as a hero. Learn how to mimic Odysseus' cunning with your financial planning.

Remember the story of Odysseus the Cunning? A clever strategist and inventor of the Trojan Horse, he left the Trojan War as a hero. According to Homer's "Odyssey," Odysseus expected a quick and easy sail back to Ithaca. Alas, Poseidon, God of the Sea, favored the Trojans, and placed many obstacles between Odysseus and home.

Two of those challenges were Scylla and Charybdis, sea hazards lying close together, blocking the fastest way for Odysseus to return home. Homer described Scylla as a six-headed monster with razor-sharp teeth, lying in wait to leap out of the water and snatch sailors from their ships. Charybdis was a monster with a massive mouth, big enough to suck in all surrounding water to make strong whirlpools. (There's a great illustration here .)

Odysseus, his crew, and his ship were caught between Scylla and Charybdis. Should he sail closer to the monster who would eat his crew, or the monster who would sink his ship?

Odysseus was forced to make a tough choice. He rationalized that it was better to lose six of his crew (one for each of Scylla's heads) than lose his entire ship in the whirlpool. He steered towards Scylla, lost shipmates, but made it past the monsters.

What's the connection between Greek mythology and financial planning? Sometimes investors have to choose between the lesser of two evils, just as Odysseus did.

We've all seen that because interest rates are so low, many investments that guarantee principal pay very little in interest. Savings accounts, checking accounts, money market funds, and certificates of deposit provide a negligible return.

On the other hand, riskier investments that historically provide growth have all suffered beatings over the last decade. Real estate, commodities, and stocks have all taken hits as the economic waters ebbed and flowed around them. What's an investor to do?

The answer is to make the same choice as Odysseus: if you're stuck between the devil and the deep blue sea, keep a calm head, weigh your options, and make the least bad choice.

If you need money over the next few years, lower-risk investments are your least bad choice, even with a low yield. The danger of losing your principal outweighs the danger of low earnings.

If you don't need money for many years, higher-risk investments (real estate, commodities, stocks) are your least bad choice, even with their added risk. The danger of inflation (as prices of goods and services rise over time) outweighs the danger of losing money in a bad year.

As a general rule, the longer until you'll need money, the more risk you can take with it. While no one wants to take on unneeded risk, you can exercise some degree of control, and choose which type of risk to assume. Be as clever as Odysseus, and choose risk's least bad form.

 

Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For twenty-three years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have comments or questions about this blog, please post in the "Comments" section below, or call Lou directly at 925-997-8507.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Napoleon Solo March 04, 2013 at 01:51 AM
And I was just indicating that people in the finance industry generally have to have advanced degrees and certain social characteristics, nothing more and nothing less :)
Californicated1 March 04, 2013 at 02:28 AM
Most of the Financial Planners I have ever dealt with had only a Bachelor's Degree, usually in Business or Economics, but I have also seen a few out there that had BA's in History and English, too, so no advanced degrees there. There may be some out there with MBA's, but those are few and far between from what I have seen, with most MBA's usually going for a JD specializing in Business Law, Patent Law and even Corporate Law so they can be Licensed Attorneys or Legal Counsel. What may set them apart, though is the licenses they may hold, like the FINRA (NASD) licenses that a professional may possess. If a Financial Professional holds a Series 7 license from FINRA, it probably means that professional can talk to you about stocks and even sell them to you. If a Financial Professional holds a Series 6 license, it probably means that the professional sells and trades in Bonds and Annuities and one may find a few Insurance Agents and Brokers with this license. If a Financial Professional holds a Series 3 license, the professional works with commodities like precious metals and natural resources and may sell futures in those. And besides the FINRA licensed professionals, there are also the NAEA licensed professionals, such as the Enrolled Agent that you may find many CPA's holding, meaning that these folks can represent you as a client before the IRS and FTB should you wind up being audited and are good folks to have around when one has tax problems.
Jolly Jo March 04, 2013 at 04:49 AM
"I'm not sure I'd call it arrogance, but people in finance generally go through a rigorous screening process and the successful candidate can be expected to have advanced college degrees, and several other skills, in addition to being professionally very presentable looking. So, most likely they are smarter and better looking than you are." Having worked as a financial advisor for a few years, and having spent years being an observer of the financial meltdown -- brought about by the wunderkind of the financial markets -- I find this statement laughable. Many have no ethics, other than what will make them the most money -- not what will actually serve their clients' interests. Most are no smarter than you or I -- hence the financial catastrophe brought about by the collaterized debt obligations and so many other things.
Napoleon Solo March 04, 2013 at 05:25 PM
Jolly: I'm confused. My post only addressed intelligence and looks among people in finance. You say your worked in finance. So, the point of your post is to say you are not smarter or better looking than average???? You probably are. I guess I'm more impressed by you than you are.
Napoleon Solo March 04, 2013 at 05:30 PM
Yes, lots of licenses. Some of that material is very useful too so mistakes are not made. Unfortunately, there is no license for the Federal Reserve chairman so that mistakes at that level are not avoided.

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