The basic problem of investing is how to invest with minimal risk. We instinctively know that “no risk” investments are virtually impossible, of course, but of what value is lowering (or raising) investment risk?
Here’s where we hit a serious quandary: measuring that risk. You could break out a financial calculator and start trying to estimate it. A fairly large portion of Wall Street does this work day in and day out.
Then a year like 2008 comes along and all that work is for naught. Perfectly good investments dropped like rocks. It was senseless, immeasurable and a direct reflection of fear, not reality.
Learning how to invest with minimal risk, then, is really a matter of looking inward. If we repeat a decline like we saw in 2008, what would happen in your own mind? Panic? Calm? Something in-between?
The way to accurately capture this sensation is by looking back at what has happened in the past, even if you weren’t an investor yet.
For instance, when the dot-com stocks sank, did you find it shocking? Or did you simply shrug and say, “Let’s see what happens next?”
If you fall into the first camp, you might be even more worried about having your own retirement savings at risk in the markets. If the latter, not as much.
Secondly, how long can you wait for a recovery to happen? Five years? A decade? Longer?
The simple fact of the matter is that markets recover. In the meantime, if you have a job and can save, lower prices are actually good news for you. You get to add to positions while they are out of favor for illogical reasons. It’s a sale!
If you don’t have the luxury of time, then you shouldn’t have been so heavily exposed in the first place.
Building a rational, risk-adjusted portfolio is not complicated. You need a mix of stocks and bonds, but also foreign equities, commodities and real estate.
If you are young and fearless, go ahead and take the more volatile, stock-heavy positions. You will do better in the long run, especially if you are not prone to panic when markets crash.
If you are older or your emotions run high when markets move, well, that’s not a bad thing. It’s your subconscious telling you step back from the ledge and take less risk.
Stay invested, just keep things tilted a bit more toward the slower-moving, less-volatile investments in your portfolio.
In either case, your risk is minimized greatly. The younger person needs to grab more assets on the cheap when they dip, while the older person needs the emotional certainty of reduced losses. It’s just a matter of knowing who you are.