New Money Rules for Financial Security - #1. Handling Risk


[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

Contemplating on Money RulesRecent times are challenging and unprecedented. Needless to say that it has brought its own bag of lessons for us. The recession, a topsy turvy stock market, job loss and several unanticipated changes are forcing us to reexamine and contemplate on the basic rules of money for attaining financial security.

While we were researching in this domain, we came across an interesting article at CNN Money which gleams light on 7 new rules of financial security. Here is our take on them based on our life's experiences and lessons learnt thereby.

Rule #1: Risk
Old thinking: If you can stomach the ups and downs that come with risk, you'll be rewarded.

New rule: Risk isn't about your stomach. It's about making or missing an important goal.

Balancing Act with RiskOur take: It's a no brainer that risk has to be embraced if we want to grow our money. We did that and the current state of the stock market wiped off 50% of our portfolio. So we learnt the hard way that it's not only about one's ability to stomach risk.

It's about using common sense and constantly keeping one's immediate basic needs as well as long term goals in view. Common sense says that if staying invested in a falling market is going empty our coffers, then by all means pull out of risky stocks and invest in relatively stabler instruments like bonds or certificates of deposits. In the process if we miss a little bit of upward curve while the market recovers, it's fine. After all we need to pay our rent, purchase groceries and have an emergency fund for the rainy day. More so, since no one can predict exactly when the market is going to recover and have a steady upward trend for a good period of time.

A practical way of approaching this goal might be to implement stoppers on gains or losses for each investing instrument in our portfolio and changing our asset allocation based on the momentum of the market. This strategy is a somewhat midway approach as compared to a total passive investing strategy (like buy and hold) and an active trading strategy which tries to time and beat the market on a daily basis.

Low Returns from Stock MarketIf we are on the verge of retirement and the market is providing low returns on our investments, then a passive buy and hold methodology with no change in asset allocation and stoppers for arrest of losses is a sure shot recipe for disaster. What is disaster? - It means chances are high that we'd run out of money before we run out of our time on earth :(.

Question

What are your views and experiences about handling risk with respect to keeping your financial security intact in the immediate present? We are looking forward towards your opinions.

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Image Source(s): iStockPhoto

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