Sushi Money

Well then.  A day to be in the markets.  Nearly an 11% gain in one day, after losing 18% last week. 

Last week was the worst week ever for the Dow… and Today was the best day ever for the Dow. 

It almost presents some zen-like Yin and Yang investing paradox as we struggle to understand how it affects us.

So what’s it mean really?  Does this mean we’ve hit a bottom?  Is the pain over?  Does our retirement portfolio head back in the other direction?   Questions many of us want to know.  But the market is funny that way.  Not funny “ha ha” but funny as in fickle:  There really are few definitive answers.  As much as we would like to know that it’s time to start investing again, we look the other way and the market has taken off somewhere else. 

So was last week the value investors opportunity of a liftetime?  Or was today really just a bear market rally?

My humble opinion:  Last week was a bottom for the short term.  Much easier calling in retrospect, huh? We may take off on a bumpy ride toward 10,000 or 11,000 on the Dow.  But let’s be realistic- the market was extremely oversold last week, and many companys’ stocks were selling for less than they were worth.   We were due for a rally… BUT!  Does that mean the credit crisis has changed?  No.  The U.S. and other countries throughout the world face many economic challenges ahead.  The landscape has changed just enough to provide hope and encouragement over the short term.  Meanwhile we watch the housing and mortgage markets, the jobs reports and the earnings reports, and we know that we may struggle through a recession or other challenges ahead.

We obviously don’t know what tomorrow brings. But here is an excellent article that shows how Keeping Your Money in the Market is a long term strategy for success.  Stocks have not been this cheap in several decades.  

But knowing that we don’t know what’s ahead, many people have figured out that they are not willing to risk their money in the stock market anymore.  Lots of folks have flocked to CD’s for a safe and sure return.  Nothing wrong with that at all, especially with a 4%-5% yield over 5 years.   

Are you that risk averse?  If investing bothers you that much, then you need to sit down with your advisor or planner and figure out a more conservative asset allocation.  If you’re handling your investments yourself, maybe sitting down with a financial planner can help as well anyway.  A year ago I talked about risk tolerance in the context of real estate investing.  It’s worth examining a little more closely, and better late than never.

The time to decide you are not comfortable losing money in a particular market investment choice is ideally before you put money there! But most of us learn things a little harder, through experience. Knowing our risk tolerance is not hard, but making decisions appropriate to our risk tolerance often is.

Risk tolerance is a very personal thing, and there are few right answers. What is right for you may not be right for me. What is right for your spouse may not be right for you, so you will need to strike a balance or an agreement for your investing goals and allocation. Risk tolerance is also tied to the time horizon for your investment goals.

If you’re saving for a down payment on home, your risk tolerance should necessarily be very low and your assets should be in a savings or money market account. If you’re examining risk tolerance in terms of retirement in 20 years, that presents a whole new perspective. The ancient Greek saying “Know Thyself” is very appropriate. We are trying to work with a level of risk that is appropriate to our goals, time horizon and personal level of comfort.

Many studies have been done to investigate consumer risk tolerance, and basically the studies show that people are normally far more conservative than they think. In other words, we often think we are willing to handle degrees of risk, but when it comes to losing money, we are not prepared for risk at all. Here are some tools you can use to analyze your own tolerance for risk:

• MSN/Money Online Risk Tolerance Quiz: A quick online assessment of risk tolerance.

The following are printable .pdf files:

• Investment Risk Tolerance Quiz: An excellent risk tolerance quiz courtesy of North Dakota State University, by J.E. Grable and R.H. Lytton.
• Risk Tolerance Quiz: This is a useful risk tolerance questionnaire from Richard D. Margarian. Use your answer choice as the points for each question, then total them up at the end.
• Retirement Risk Tolerance: A short analysis form that looks at risk from a retirement goal perspective.

There’s also few things better than a good second opinion. If you want objective advice and a closer examination of risk and asset allocation, find a professional Certified Financial Planner in your area using the Financial Planning Association’s search tool.

And one other note:  If like many people, you’re just not looking at it anymore… well that’s called “The Ostrich Method of Investing.”  Might be okay if you’ve established some long term goals for 10-20 years from now, but it doesn’t always work out the way you might think!   Especially if you need money over the short term. 

For those who really believe the future is pretty bleak for the next 10-15 years, then maybe you do want to find a safe place to keep your money.  But I’m not going to bet against America, or the ingenuity of a whole bunch of folks that love business and capitalism. 

Besides, too many people like finding ways to make money. Greed is a heck of a motivator.  And from my perspective, the stock market is a pretty good long term proxy for the success of our free market economy. 

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