Personal Budgeting: Find Your Level of Acceptable Investment Risk and Stick to It
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Personal Budgeting: Find Your Level of Acceptable Investment Risk and Stick to It

If you make an investment plan, the best thing you can do is stick to it.

Step one to investing is eliminating debt and covering your obligations. Chances are that your rate of return on investments is always going to be less than the interest rate on money you owe. In both cases, you are a consumer buying a product, and you are at the mercy of the owners of the means of production (as Karl Marx would say). Step two is to take in all the advice you can about what’s smart and what isn’t. Step three is to figure out what you need and ignore everything you have just learned.

As a consumer, you have to remember that all investment advisors are also salesmen. They are selling products just like everyone else is, and they are going to do their best to convince you that what they have to offer is the latest and greatest. It is in your best interest to nail down your plan and then stick to that plan.

The conventional wisdom is that high risk investments should primarily be taken on by the young. In fact, almost any age group that is not within 10 years of needing their investment money can consider a high-risk investment plan. The problem with high risk isn’t that your investments are going to crash and burn and change your retirement location from Boca Raton to Birmingham. The problem is that many who take on high risk plans fail to consider the difference between paper losses and real losses.

High risk plans take an iron constitution. I do not have the stomach for it, because I don’t like to see wild fluctuations in my money. The key is that higher risk generally offers a better overall rate of return if you keep your chips in. Most see paper losses and cash out “so they don’t lose everything.” They do not realize that they just picked the absolute worst moment to drop out of the stock or mutual fund. They made their paper losses real. Making any plan work means sticking it out until retirement.

Whatever your retirement plan consists of, you must remember that all money fluctuates with the economy. If you can invest a significant portion of your earnings each year (say, 10%), then you will end up with a sizeable sum at retirement to spend at your leisure. Also remember that you may have access to better plans than others. Soldiers should consider the Thrift Savings Plan (TSP; an IRA style investment for the armed forces). Many companies offer matching 401(k) contributions to their employees. What could be better than free money?

 

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