Hello!
It seems as though winter wants to arrive yet every time we get snow, the temperature goes up and the snow melts. What a winter!
This week I want to comment about the markets and risk. Prior to the introduction of 401(k) plans and IRAs in the mid-1970’s, a very small percentage of people invested in the stock market because they a) did not understand the stock market and b) were afraid they would lose their money. Once the 401(k) and IRA retirement savings plans were introduced, the percentage of individuals with money invested at risk increased tenfold from 5% to over 50% of the population. However, most people still didn’t understand the markets any better than previous generations; it was merely a by-product of the fact that most 401(k) and IRA plans were administered by investment firms whose focus was (and is) on market or risk investing.
As I have noted in previous columns, the degree to which any individual invests in risk investments is dependent on many factors including:
- The person’s time horizon
- The person’s risk tolerance (attitude about risk)
- The person’s risk capacity (ability to absorb losses)
- The person’s need for income
As you may be aware, the market’s performance over the last 10-12 years has been lackluster, with the S&P 500 averaging about 2% per year including reinvested dividends but before management fees. After fees, the numbers are essentially flat. So far this year, the numbers are better but there are those who believe that another correction is coming which may erase most or the gains to date (see linked article from the 1/29/12 New York Times below).
What is the best choice for you? As with so many things in finance, the answer is that it depends. There are a variety of factors which have to be considered in determining the best allocation between safe and risk investments although there is a ”Rule of 100” that is useful in beginning the conversation. Please click on the inserted tab below to open a video interview I gave on the checksandbalances.tv network on that subject.
The key to investing funds for retirement or in retirement is to minimize losses. If we rarely or never lose money, then we don’t have to grow our money to recover what we lost. All gains will be net gains – our funds will constantly be going up. We may invest more conservatively than the people we see on CNBC suggest but the point is to insure that our money lasts as long as we do. That’s not something on which the folks on CNBC focus much attention.
Where are you in this journey? If you are investing funds you can afford to lose, you are an investor. If you are investing funds you cannot afford to lose, you are a gambler. Are you a gambler thinking you are an investor? If so, we should talk. I help many people earn reasonable returns while keeping their risk exposure within tolerable limits. If you want my help, call me.
