Blonch

Times are tough

Unemployment is up. Retail sales are down. Demand for consumer goods is down. Stock prices are down, but have they found a bottom yet? Earnings keep falling, so maybe stocks still aren’t really cheap. Commodities are all over the place, with precious metals still high and other commodities way down from their earlier highs. Interest rates are low and inflation risk seems distant. The government is getting more and more involved in financial institutions and the automobile industry. The President is promising to “reform” health care. The spending stimulus seems less focused than promised. There seems to be bad news everywhere.

Turmoil in the market has impacted nearly everyone. It is hard to know just what to do. Investing these days reminds me of the saying – “Predicting is hard, especially about the future.” The economic news is not good, and may not improve for a while. So, what to do?

Investment choices

Investment choices are guided by several factors. There is no answer that applies to everybody, even during better economic times. Three factors will dominate your approach to investing: investment horizon, risk tolerance, and your involvement. Let’s look at each one.

Investment horizon

The longer you have until you need the money, the more choices you have for investment vehicles, and the more ability you have to ride out periods of loss.

Risk tolerance

Risk is defined as uncertainty of outcome. Part of risk tolerance is your emotional makeup – can you sleep at night if you might lose some money? Another factor in your risk tolerance is how dependent you are on the money. Risk and reward are positively correlated. The more risk you are willing to accept, the more potential for reward you have, but if a loss will create a hardship, then you can’t take much risk.

You may have more than one answer for risk tolerance. You could have a base of investments that you depend on that are less risk tolerant, and then some “extra” money that you can take more risk with. My mother is retired and has enough retirement income to take care of her basic needs. Beyond this, she has some money she “plays with” in the market. The market has been tough on her the past year or so, but that isn’t money she depends on. It’s not the typical investment approach for “widows and orphans” but it works for her.

Involvement

Do you want to manage your investments yourself? Just having the interest isn’t enough. Do you have the time and ability to do so? There are costs either way. If you get somebody else to do it for you, they are going to get compensated in one way or another (commissions or fees). If you do it yourself it is going to require your time and energy that you could have put into something else. If you aren’t really interested in managing the day-to-day details, and have time and expertise to do so, you should probably get an investment professional involved.

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Investments by PecosJack