The sensible way to make money by investing money is to use a moderate to conservative investment strategy. Why did millions of Americans lose a large part of their life savings in 2008? They had an overly aggressive investment strategy. They had a large portion of their investment assets at risk in the stock market and many of them didn't even know it.
I don't care how old you are; keeping 80%, 90% or more of your investment assets in the U.S. stock market is too aggressive and too risky. Plus, it diminishes your flexibility and ability to take advantage of investment opportunities.
By early March of 2009, stocks had lost half their value in a little over a year. Had you been heavily invested in equities (stocks) throughout this period, what investment options did you have in the first half of 2009? You had two investment options, and both were negative.
First, you could sell stocks at a loss. Second, you could hold on and hope that the stock market came roaring back. Either way, you were in a losing position.
The stock market came back with a vengeance, up 50% in six months. Those who sold earlier and took big losses were not happy investors. Others who held on were still behind. If you had $10,000 in stocks and lost half you were left with $5000. Then when you gained 50%, you were only up to $7500.
I don't care how old you are; keeping 80%, 90% or more of your investment assets in the U.S. stock market is too aggressive and too risky. Plus, it diminishes your flexibility and ability to take advantage of investment opportunities.
By early March of 2009, stocks had lost half their value in a little over a year. Had you been heavily invested in equities (stocks) throughout this period, what investment options did you have in the first half of 2009? You had two investment options, and both were negative.
First, you could sell stocks at a loss. Second, you could hold on and hope that the stock market came roaring back. Either way, you were in a losing position.
The stock market came back with a vengeance, up 50% in six months. Those who sold earlier and took big losses were not happy investors. Others who held on were still behind. If you had $10,000 in stocks and lost half you were left with $5000. Then when you gained 50%, you were only up to $7500.
Many investment companies and advisers recommend that younger people should be 80% to 90% invested in stocks (like in their 401k plan). I suggest investing money more conservatively, now matter what age you are.
For example, let's say you want to be more conservative and make money investing with a lower-risk investment strategy. Keep about half of your investment assets in stocks and the other half in safer investment options like savings, money market securities and intermediate-term bonds.
Now, here's the important (and somewhat scary) part. When the stock market takes a big hit (say 20%) ... you move some safe money to stocks. The market goes even lower ... you take advantage of the investment opportunities out there and move more money into stocks.
Now, the question is: as the stock market approaches a 50% drop from its high, what percent of your total investment assets are you willing to bet that the market (and the economy) will recover? If your answer is 80%, for example, make that your limit.
The simple truth of the matter is that when you invest in the U.S. stock market, you are betting that the USA will survive and prosper ... no matter how bad things get. If you want more security than that as an investor looking for investment opportunities, invest in foreign stocks as well. That way you are betting on both the USA and modern civilization in general.
If the whole economic system we live in collapses ... it won't matter if you tried to make money by investing or not. When chaos rules (if it ever does again), it's all over anyway.
Getting back to a positive note, if you have a more conservative investment strategy a bad stock market can spell INVESTMENT OPPORTUNITIES for you. You will have the flexibility to take advantage of the situation; and avoid the heavy loses no investor can afford to take.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
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