In the past few days the markets have reminded us of the potential risks of investing – things can lose value, sometimes dramatically. Unfortunately too many people needed the reminder, having grown complacent with the steadily rising returns – so comfortable they may have even changed their asset allocation to hold more equities because they were not seeing the returns their friends, neighbors or loud guy on the Subway were getting.
Chasing returns is, in my opinion, an exercise in futility. Instead, determine the appropriate amount of risk necessary to achieve your goals (removing greed from the equation) and start there. Most (I’m pretty sure this is really all, but just in case) reputable firms offering investments will have a tool to help you determine your risk tolerance – so be honest when completing it.
You will see more impact over time from how much you invest, so get your money working for you as soon as possible. If you have children, start having the conversation with them about saving – anytime they receive money (job, gift, allowance, etc) take 10% and set it aside for future goals (doesn’t have to be college, could be 1st car, 1st apartment, etc).
No matter what you do with your money there will be risk. If you stick it in savings you have the risk of its value not keeping up with inflation. If you spend it, because after all you can’t take it with you, there is the opportunity cost (risk) of the potential growth you could have experienced and the value it would have grown to in your later years. And we’ve already covered what could happen if you invest.
So what to do? Keep money you’re going to need in the near future (< 3 years) relatively liquid (available) – that could be CDs, savings accounts, etc. The further down the road you need the money, the more risk you can take – as long as you factor in your risk tolerance (how accepting you are of risk).
The worst thing you can do is use someone else’s investment philosophy without consideration. Determine what your goals are, how long until you need the money and how much you potential loss you can accept to get there. None of this is meant as investment advice, I have no way of determining what is/isn’t appropriate for the reader. If this resonates with you, and you want help, find an Advisor you can trust (this includes online options like Betterment or Wealthfront).