Investing is an interesting endeavor. You buy an investment on the expectation of it going up. You then have to sell or you never realize the full benefit of waiting.
So investors tend to buy stocks a lot, and they like when stocks and the stock market go up. The higher the better.
Of course, stocks also go down, and sometimes way down. You don’t have to look that far back — to 2008 and 2000 — to see how painful a market reversal can be.
But what if it didn’t matter if stocks go up or down? What if you were able to create the investment version of “heads I win, tails you lose.”
You know the joke. The person you are betting with doesn’t listen and doesn’t realize that the coin will land heads (I win) or tails (you lose), that is, I win no matter what.
The closest thing to that scenario in long-term investing is portfolio investing. And it’s simple.
First you buy a load of stocks, preferably using low-cost index funds. Young people would likely own mostly stocks, and older investors might want less but still more stocks than anything else.
Then you buy some bonds, enough to counterbalance the stocks a bit. You could then add real estate, foreign stocks and bonds and other asset classes, but in much smaller amounts.
Sit back and wait. Stocks will go up, as they usually do, for long periods of time. You will collect dividends, which if you are smart you will reinvest. The bonds will generate income, also to reinvest.
The other asset classes will do what they do, including generating some reinvestment income. Over time, you rebalance, directing cash to the parts of your portfolio that no longer reflect your original targets, or selling some investments to generate cash to rebalance.
That day when stocks decline is coming, and everyone knows it. Here’s the trick to remember, the “heads I win, tails you lose” way to invest for retirement.
If you are young and stocks fall, do not sell. Instead, use your regular savings to buy more while they are cheaper. In time, stocks will rebound.
As you age, just lower your total stock holdings, bit by bit. Own progressively more bonds instead. That will keep your portfolio from nosediving in a market crash, particularly right before retirement.
Keeping yourself on the road to a steady retirement is nothing more than keeping that balance of stocks and other investments in line with your real risk tolerance. For some that will be more, for others less.
In time, the coin comes up heads or tails. Either way, you win.