Does a recession mean that we should all throw in the towel, settle for mediocracy, not strive to purchase our dream house and not take some risk with our future by investing in mutual funds, exchange traded funds (ETFs) and other securities?
As the global economy has crashed, job security, retirement portfolios and equity that homeowners once bragged about has quickly diminished. As a result, many investors have shied away from taking any risk of any kind – even younger investors, who are often encouraged to take more risks while they still have many working years ahead. Are we becoming too skittish?
Research has indicated that without taking some risk, we will guarantee ourselves a lower standard of living and a smaller ROI. In fact, being overly cautious can do more harm for young investors than taking risk. After inflation, over the last 80 years, stocks have returned 5.82%, while bonds have returned 1.95%, states David at Pimp Your Finances.
Here are a few ways we can prevent ourselves from getting slammed and lowering our risk exposure:
- Pay off high-interest loans like credit card debt and private student loans, states Ron Lieber of The New York Times. This will offer a guaranteed return in that for every dollar you pay now, will prevent you from paying more interest in the future.
- Only purchase big ticket items like houses and cars that you can afford and don’t overextend yourself.
- Educate yourself and keep current on economic trends and times.
- Utilize ETFs. They are the all versatile tool that come in many shapes and sizes and can be utilized in several ways to lower risk.
This is all fine and dandy and now we all know a few ways to manager our risk exposure. However, we are not all created equally when it comes to our appetite for risk. So what determines this appetite? Some say it is our profession, others say it our genetic makeup, some believe it is the state of the economy and some believe it is a combination of all three.
It will be a terrible thing if the current economic recession has a long lasting impact on the way the future generation invests. Remember that the most valuable asset that we have is our potential earning power, not our homes our 401(k)s.
The trend-following plan is a simple way for investors of all types to manage their risk. By entering the market only when a clear trend emerges, and getting out at predetermined points (we use an 8% stop loss), investors can get a better handle on their risk and not bite off more than they can chew.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.