The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 41. Taking Risks

THE FIRST PIECE OF ADVICE a financial planner usually gives to a client is to get a notion of how much risk he can tolerate. Until recently, most Americans saw risk as a rollercoaster, the economy and stock market had their ups and downs but always came through in the end.

A decade ago, none of us could imagine that, even if we chose investments wisely, we might lose 35 percent of our money, or even 50 percent of our money, as some investors did in 2008 and 2009.

Then came the housing bubble, the housing bust, and the market collapse of 2008 and 2009. This time seemed different with financial institutions that were household names like Citibank and Bank of America begging for government money while the automakers headed toward bankruptcy and unemployment soared.

Of course, investing is risky. So is not investing. If you think that risk simply means that you might lose the dollar you have in your hand, you need to broaden your thinking. If you are too conservative, you risk losing new opportunities, losing your chance for a better life.

The most basic risk investors face is not an academic one but an emotional one: The fear that the money they invest will decline in value, even temporarily. A decline in the value of an investment makes many people feel both foolish and anxious. When these people think about risk, it means one simple thing: What is the risk to my principal? If I invest $10,000, is there any chance that my money will ever be worth less than $10,000? ...