It is important to understand how the game works before you even start playing. It is like the famous board game, Monopoly, you can’t buy Boardwalk if you don’t have the money. And in the game of stocks, you cant be a savvy trader without, understanding risk. I plan on describing what the term risk means and how it should affect your portfolio based upon your age with the three groups of stocks.
First off it is <strong>extremely </strong>important to understand there is <strong>risk</strong> in any investment. Even putting your money in the bank has it’s own kind of dangers. The FINRA, Financial Industry Regulatory Authority, describes risk as
<blockquote>When you invest, you take certain risks. With insured bank investments, such as certificates of deposit (CDs), you face inflation risk, which means that you may not earn enough over time to keep pace with the increasing cost of living. With investments that aren’t insured, such as stocks, bonds, and mutual funds, you face the risk that you might lose money, which can happen if the price falls and you sell for less than you paid to buy.</blockquote>
However, with every risk there is an opportunity to gain. It is understood that the higher the risk the greater the gain. But it is important to arrange your portfolio, according to the risk. It would be foolish to invest in a newly founded technology company 10 years before retiring, due to the implicit risk of the investment. Therefore, it is best to set yourself up according to your age group with the emphasis on your retirement.
I believe in 3 groups. The first group being investors up to the age of 30. I like to call this group the <strong><em>Speculators</em></strong>. Since, a typical person that is around 20 years old has the ability to invest in speculative stocks–risky stocks that have the ability to either go to 0 or even triple in profits in a shirt period of time (think of it as investing the future Microsoft). AND, still make their money back if they incur any losses, which lowers their risk in the long run, <em>which it is all about.</em>
The CNBC pundit Jim Cramer, in the book <em>Real Money, </em>argues that
<blockquote>The younger you are the more important it is that you take even bigger speculative risks with that money because even if you get wiped out you have nearly your whole working life to make it back.</blockquote>
Once you hit your thirties, it is time to scale back on the speculative investment and start thinking long term and prepare yourself for retirement. I prefer to call this group of individuals as the <strong>Coupon Cutters</strong>, since, it is now the time point and time for them to save as much as possible. Here I would suggest investing in scaling back the amount of speculative investments to approximately one, and staying conservative with your other investments in your portfolio, looking for stocks that pay dividends.
The final group, the 40s and above, should be as conservative in their investment as possible. If you plan on investing in the next twenty years it is advisable to put a little more than half of your investments into fixed income. I love to call this group the <strong>Floridians, </strong>as they prepare to retire in the sunshine state.
This is only an introduction to risk and how to decrease it. But, regardless of what group you are in it is important to understand <strong>Risk</strong> and <em>eliminating it as much as possible</em>. In this circumstance, it is controlling it in the long run with your age and types of investments; gradually, decreasing the amount of speculative stocks the older you become.