Stock Investors: No Pain, No Gain?
The well-worn cliché about body building (if you don’t exercise until it hurts, you won’t see spectacular results) is often used to describe the nature of risk in investing.
If you aren’t willing to take some risk, don’t expect spectacular gains.
Many investors are happy with modest returns in exchange for less risk on the downside.
However, after two extraordinary down markets since 2000, these investors may feel they got the pain, even though they didn’t hold risky positions.
The problem that stock investors struggle with is how to determine exactly how risky their positions are.
There are services and formulas to help you determine your risk, but they can’t predict the future.
You can make some decisions based on whether you think interest rates are going up or coming down, for example.
However, you won’t find a model that accounts for a volcano eruption disrupting air traffic and, consequently, lost tourism dollars and extra expenses for businesses.
Of course, erupting volcanoes aren’t an every day risk.
They are at one end of a spectrum of risks, some you can quantify and others you can’t.
A couple of basic rules:
• Decide on what works for your situation in terms of what percentage of your investing assets should be in stocks, bonds and cash. Maintain this ratio by rebalancing your portfolio at least once a year and more often if needed.
• Don’t count on stocks for any money you need in the next five years – they are too volatile. Money that you will need in five years or less should be in bonds, bank accounts or other relatively stable investments.
• Remember, the market will go up and the market will go down, but you will never know in advance when it begins moving predominantly in one direction.
• Finally, remember that risk gives you the opportunity for better-than-average returns, but it also means there is a better-than-average chance you will lose mone