Friday, May 4, 2012

Money - Risk Tolerance #2

I didn't get as many comments that I would have liked on my previous risk article, however I did get two.  Perhaps I will get some more responses after this article.  Let's take a look at the responses.

  Year 1    Year 2    Year 3    Year 4   Year 5
3.  10%         8%       5%         12%         8%
7.  20%       -4%       15%       -10%         25%

These were the two choices selected by a couple of the readers of this blog.  The reason for #3 was that option gave the highest return after 5 years, and for emotional stability.  Someone picked #7 because it had a higher percentage return.  Both options cannot have the highest return.  We will look into this.  If we took $1,000 using an annual rate at the end of 5 years option 3 would yield $1,508.86, and 7 would yield $1,490.40.  Option 3 did yield the highest amount of money over the past 5 years.

Something that you have to remember is past performance does not guarantee future results!  This means that you need to be future minded.  Has anything changed over the past 5 years from today?  Things like investment strategy, management, fee structure, economic conditions, and law changes (tax or otherwise).  Going with option 3 might give you the highest results, but you would have to wait and find out after another 5 years.

Also, you have a couple other options.  You can do nothing.  Doing nothing is always an option, and sometimes is the best choice.  You can pay down debt.  That is an option if you have debt.  You could buy gold or silver, or invest in real estate.  You could buy a farm and raise livestock or fruit/nut trees.  Lots of money in trees.  I believe that if you had an acre of mature black walnut trees, they would be worth millions.  Too bad they take like 150 years to mature.  These trees go for around $10,000 per tree.  You could plant 400 trees on an acre.  You can do the math.

This is one of the biggest problems with investing.  There are so many options.  I find it funny that more mutual funds exist than stocks.  This shouldn't be the case, but goes to show how much money is floating around.

Getting back to the example.  Let's say you decided to do some research before investing in option 3.  You found that the star fund manager from option 3 decided to leave and work for option 2.  Would that change your mind?  Would that make option 3 more risky?  You also found out that option 3 manager used stock options in the portfolio.  The fund was a value fund, and used a covered call option strategy.  It is an election year, and there is talk about changing the capital gain and dividend tax.

How will you invest?  Will you invest monthly?  Will you invest in a lump sum?  Will you invest inside a tax shelter such as an IRA?  What are the pros and cons in doing this?  Should I be asking my stockbroker these questions?  If not...who will answer these questions for me?  Finally...who has time for this stuff?

Remember...your stockbroker will say just about anything to get you to invest with them.  If you don't have time for learning how to manage money, then you cannot expect to receive stellar rewards.  Everyone can get lucky, but luck runs out eventually, and sometimes turns into a disaster.

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