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When you invest, you are taking some risk.
So if you think you don’t like risk or you think you don’t have any risky investments, then look again. You are taking some risk when you invest.
Below are 10 attributes of Investment Risk:
1. Market Risk
This is the ups and downs of the market. Lately, this has made a lot of folks sick. The sicker it makes you feel the more you should look at your portfolio and adjust it so you can handle the wild swings of the market. This could mean that you invest a higher percentage of your portfolio in bonds.
2. Inflation Risk
The cost of living goes up. If you invest in something that returns 2% and inflation goes up 4% then you’ve lost 2% of the value in your investment. My parents and parents-in-law thought they would be able to live their retirement years with $100,000.00. Back then, 1930s thru 1940s, $100,000.00 made people feel they were rich forever.
3. Opportunity Risk
Opportunity Risk is when you decide to invest in one type of investment, you’re also deciding not to invest in others. So if you commit money to a certain investment and it goes down in value, you’re stuck in that investment and are not able to participate in another investment that might be more attractive.
This is especially apparent when you purchase your own bonds for instance. You could be stuck in a 10-year bond and you want to get out because of high interest rates. You would then be forced to sell for a loss. It’s much better to invest in bond funds because the fund manager has the ability to invest in many different types of bonds.
4. Reinvestment Risk
Reinvestment Risk has to do with timed investments like CDs and bonds that you purchase yourself. A mutual fund manager has the ability to diversify a portfolio of these types of investments by selecting from a larger basket of different types of CDs and bonds to reduce the risk.
5. Concentration Risk
Diversification, Diversification, Diversification. Don’t concentrate your investment dollars in one type of investment. Read my article here on Diversification.
6. Interest Rate Risk
When the Fed messes around with the interest rates moving them up and down, the markets react. The value of bonds go up when interest rates go down. The value of bonds go down when interest rates go up. Keeping a well diversified portfolio will reduce the affects the Fed’s have on your portfolio.
7. Credit Risk
“The Credit Crunch” is what we’ve been in lately. The financial sector has taken a hit. The financial sector includes lenders like Countrywide Bank. On another note, I’m watching that sector with everyone else because it just might be getting ripe to pick. Since I write about options at this site that’s how I’d play it if something comes up that looks interesting.
8. Marketability Risk
Having the ability to sell you investment(s). This pertains to a low interest in stocks, bonds or CDs that you may personally own. By “low interest” I mean not enough buyers. This is reduced immensely if you invest in a mutual fund.
9. Currency Translation Risk
The value of the dollar goes up and down in the international market depending on what country. This is one reason why it’s good to just have 10% of your portfolio in the international market.
10. Timing Risk
The market goes down and you feel uncomfortable about it so you sell one of your investments that you shouldn’t sell - bad timing.
What to do
Invest in mutual funds and you’ll reduce a lot of this risk. Not completely, but enough to make you sleep at night while your money is working hard for you.
If you’re a high school student or in college and worked over the summer to make some money, then you can get started on the two actions I talk about at this site - open up an online savings account and start a Roth IRA.
I know you think you need all the money you made over the summer or the part time job your holding during school but it’s easier than ever to start saving and investing when you’re young and it’s crucial to your financial practices throughout your life.
#1 - Open an Online Savings Account
Below is a list of online savings accounts to get started. These types of accounts make it easy for you to open up an account quickly with as little as $1.00. These accounts also make it easy to transfer funds to the account. However, please set this account up so that you are depositing money on a regular basis (for example, monthly) and automatically (say from your checking account) so you’re not tempted to spend all of what you make.
What is APY?
Some online savings accounts currently pay 5.05% APY. APY stands for Annual Percentage Yield. The APY is similar and sometimes confused with APR - Annual Percentage Rate. But it’s different in that Annual Percentage Yield is calculated using the effects of compounding. Typically APY is compounded daily.
Here are some online savings account that allow you to open up an account paying 5.05% APY with a minimum of a dollar to start:
There are plenty of online savings accounts out there and if you don’t want to do a bunch of research then one of the above will do you good. Just get going and set your deposits up automatically every month or whenever you can afford to.
However if you would like to do some more research here are a couple sites to get started with:
It’s extremely easy to say, “Oh, I’ll just do it when I finish college and get a great job.” Well, there’s more going on here than starting to save when you have money. It gets really hard to do it when you hardly have any money.
This is a common scenario for students who finish college and start a new job with a bunch of school loan debt and possibly bad credit card debt. Your money is your money!! Respect it by respecting yourself by doing the right thing - pay yourself first no matter what!!
The money in your life makes a lot of things happen and makes you act and react to life’s events as they are presented to you as well as the relationships you have with other people.
#2 - Open a Roth IRA
If you’re under age, you’ll need your parent or guardian to open a custodial account for you. After that, if you have or had earned income (money from your job) for 2007, you can invest in a Roth IRA.
Try this mutual fund and follow the steps here to get going. If you don’t like this fund make sure you read this and this before you invest in a mutual fund that you’re interested in.
For a lot of young folks Thursday nights start the weekend party.
When I was in my twenties in college and after college, my friends and I were out and about either in a nightclub participating in the atmosphere or providing the atmosphere since I was a musician back then.
When you’re young it’s very easy to do this because you’ve got that never-ending energy that keeps you going for days on end with very little sleep. This also explains why some consider every night a weekend night. Reminds me of one of my daughters. 
These activities also might explain why you don’t have any money to save automatically or invest automatically. Well, a good replacement for these Thursday night outings and saving a bunch of money is to get involved with a volunteer program of some sort or go help out every Thursday night at your local homeless shelter.
I did this almost every Thursday night for two years in my thirties. I would go straight from work which was only about a mile away from the local homeless shelter. Mostly it was to wash dishes and organizing the supplies in the basement of the shelter. I also made sure I was there for Thanksgivings as well where you mostly wash dishes.
A lot of times people who volunteer think they’re going to do some wonderful part of the job like serving the homeless food and possibly make it on the local news displaying their goodwill for all to admire, but typically people are needed to do the most mundane jobs - like washing dishes or organizing supplies in the basement. They’ll probably remind you that they need help all year round and not just one day or night a year.
So, go find something to volunteer for on Thursday nights when you might typically spend money. If you have spent money foolishly on Thursday nights, take that money and save it automatically online or invest it in your Roth IRA like we’ve talked about in the three actions.
Another good idea to do with the money you save by not going out on Thursday nights is to start writing down now, in August of 2007, what you’re going to spend on holiday gifts this year.
Make a list of all the people you need to buy gifts for and use some of your Thursday night money that you save NOT going out and partying but for holiday gifts. Keep in mind that the presents you buy and give won’t be remembered as much as the time and attention you provide people during the holidays. This should help you determine how much to spend on holiday presents. Especially if you have kids. They will NOT love you less if you don’t buy them the biggest and best present of all.
Try asking the people you gave presents to last year what you gave them or what they received from so and so. Some folks can’t even remember. Then ask them what kind of memorable moments they had during last year’s holidays. Hopefully they remember the time shared with you and other loved ones.
Think and list what kind of memorable moments you want to create this Christmas that don’t include buying and giving expensive gifts.
On this blog, Smart Saving and Investing, I concentrate on three financial tasks that many people can do:
Although these three actions sound simple, taking action to get these in place requires effort. It also takes effort to decide what to invest in. Which typically brings confusion and for a lot of folks, no action taken.
Well, depending on your age and your ability to stomach these markets that are going crazy lately, bonds can and do play an important part of your investment portfolio.
We’ve been taught that bonds are a more conservative investment because they are fixed investments and can ride out the markets ups and downs. While you watch your stock mutual funds go up and down, bonds sit there and provide stability. Which is kind of cool to watch when your stock mutual funds start falling.
I would start investing in Bond Funds at 50 depending on what I’ve accumulated in my portfolio over the years. However, I do know that some folks get queasy watching all the money they’ve invested over 10 or 20 years go up and down so dramatically no matter what age they are and Bond Funds would give them a more stable feeling through those times.
Therefore, if you’re going to invest in Bonds, invest in Bond Funds. Why? Because Bond Funds have the following benefits:
* - Dollar Cost Averaging is when you invest the same amount on a regular basis to achieve the best average price. If you invest $50.00 every month and your bond mutual fund goes up, you buy less shares, if the bond fund goes down, your $50.00 involvement buys more. Over time, your average price is lower than if you tried to time the market and buy when you think it is right to buy.
There are a lot of Bond Fund types: U.S. Government Funds, Corporate Bond Fund, Municipal Bond Funds, Bond Index Mutual Funds, Multi-Sector Bond Funds, Convertible Bond Funds, Ultrashort Bond Funds, International Bond Funds, and Emerging Markets Bond Funds to name a few.
How to decide to include Bond Funds in your portfolio:
Vanguard Group, Inc founder John Bogle recommends holding a bond position equal to your age. So if you’re 50, you’d own 50% of your portfolio in a bond index fund. When you turn 60 you’d have 60% in a bond index fund, etc. He also mentions that other investment professionals have called that too conservative. Mr. Bogle mentions you could also use your age minus 10 as well. So if your 50 years old then you’d have 40% in a bonds index fund.
I would suggest that when you’re in the accumulation stages of life, your bond fund exposure be 0% if you are under 50 years of age.
When you hit 50 years old, you might want to include one of the funds below. I’m more on the aggressive side of investing so I would hold something like 20% to 25% in bond funds or a balanced fund that owns a portion of stocks and a portion of bonds.
At 60 years of age I might look at 30% to 40% of my portfolio would be in bond funds. Even at 70 years old, I still would be involved with some aggressive investments but it would be below 40% of my portfolio, with bond funds occupying over 50% to 60% of my portfolio.
With all that out of the way here are the funds we’ve discussed and you can look at for your portfolio.
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