- Reevaluate your risk tolerance – Investors tend to be more aggressive when markets are going up. Having a taste of the losses that are possible often tames one’s appetite for risk in their portfolio. You can think of risk tolerance as a continuum from very conservative to very aggressive. I use five categories: Very Conservative, Conservative, Moderate, Aggressive, and Very Aggressive. The longer you have before you plan to use the money and your tolerance for fluctuations in the market, are the primary factors that help you decide.
- Check in with your advisor - as market and economic conditions change, your advisor’s recommendations may evolve. The advice you’ve received in the past may have been the best at the time. Markets are clearly in a different situation than they were a few years ago. If you haven’t checked in, do so.
- Consider investments in sectors, industries, or companies with inelastic demand - under difficult financial conditions people and companies cut unnecessary expenses. If you’re invested in the necessities of life and commerce you may gain an edge. While we may be able to reduce our food and fuel expenses, most of us can’t eliminate them the way we can entertainment, new cars and other luxuries. Examples include energy (clean and otherwise) and commodities.
- Consider using precious metals investments as insurance against inflation and currency devaluation - the US dollar (USD) index (a measure of the USD relative to other developed countries’ currencies) has declined at about 7% a year for the last five years. Add to this the federal government reported inflation of 3-4% (these statistics are suspect and real inflation may be more like 7-10%) and you have a strong case for seeking a reliable monetary unit. Gold and silver have served as money throughout history. In fact the US Constitution explicitly states that only gold and silver coin can be used as money1. A point apparently lost on our contemporary representatives.
- Make loans (buy bonds) only from the highest rated creditors with tangible assets to back up their obligations - in the middle of this credit crisis defaults are a reality. To manage the risk in your investments keep the maturities short; five years at the longest, 6 months is even better. A friend of mine put it well when she said, ‘you should own long-term bonds right now for about as long as you would hold a hand grenade with the pin pulled.’
- Avoid the riskiest assets - the bulk of the problems investors face today are US centric: the housing bubble, the credit crisis, the falling dollar, etc. Traditionally US investments have been considered safer than those abroad and likewise the US dollar safer than foreign currencies. Well times have changed. While the situation in the US is dragging down stocks and economies around the world, in my assessment; stocks, bonds and currencies abroad may be less risky.
1Article I, Section 8, Clause 5: The Congress shall have Power To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. Article I, Section 10, Clause 1: No State shall coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.
These are general comments and ideas. This should not be interpreted as individual advice. Ask your advisor.
