Money: Risk vs. Reward

I occasionally blog about money. Since I'm not a wealthy person my money advice has to be taken with that knowledge in mind.

I do try to be read up on some of the basic ideas you hear on shows like Suze Orman (I can't watch a complete show as she is a little too intense for me but I catch little tidbits), Bob Brinker and Ric Edelman. I'll visit web pages like the Motley Fool.

One of the big ideas is the risk vs. reward. In order to get a larger return on investment (reward) you have to be willing to take greater risks. The corollary is you can accept greater risk if your time horizon is longer.

In practical terms, if you know you will need the money within a year or two then park it in a very safe place like CDs and super safe short term securities like US government debts.

If your need is farther off into the future, increase the percentage that is in stocks. For instance as a 40-something who is looking at retirement 20+ years into the future, I'm putting retirement money (403b and IRAs) with a weighting in stocks in the 75% range. My thinking is when I hit my 50s, I'll begin to get a little more conservative and have 2/3 of my retirement funds in stocks. And when I hit my 60s, probably 1/2 of my retirement funds will be in stocks. I'll think about the 70s maybe 20 years from now!

Markets can be volatile but the general trend has been up because the US economy overall is doing reasonable well. For instance, on June 13, 2006 the S&P500 was 560.7 and it ended the year at 660.41 for an 18% run-up over a 6 month period.

However, since the beginning of the year, S&P500 hasn't done much closing yesterday March 28, 2007 at 647.87 which is nearly a 2% loss.

Economic news has been mixed of late (good GDP numbers but worries about the housing bubble) hence the sideways movement of the markets. Stay tuned.