Rules of Thumb To Help Manage Risk

by Dual Income No Kids on October 7, 2008 · 0 comments

Hi All,

Okay. You’ve probably been following the headlines so you know the economy is going through a bit of rough patch. That said, if you have any reasonable amount of money or other forms of assets, you’ll probably inevitably have to incur some kind of risk. It’s important that the risk you take on makes sense for your expected return. Here are some rules of thumb that you manage your risk when you are thinking about what kinds of assets to buy.

Use Money Market or CD for the Following:
1) Downpayments for large purchases like cars, houses or tuition payments
2) Short term emergency funds
3) Capital Preservation if you don’t have a job

Use Stocks For:
1) Goals requiring large sums of money in a future date, such as saving for a childs education or retirement
2) Creating passive income from dividends and capital gains

Use Medium Term Bonds For:
1) A hedge against deflation or inflation
2) Diversification
3) Adding to your income

Use Long Term Bonds For:
1) Profiting from falling interest rate environments
2) Preservation of capital
3) Hedging against deflation

Use Investment Real Estate For:
1) Adding to your income
2) Building retirement savings
3) Hedging against inflation

Use Collectibles and Precious Metals For:
1) Hedging against inflation
2) Capital preservation
3) Aesthetic Enjoyment

Remember folks – the economy is cyclical. Right now things are doing poorly, but eventually the USA will recover and it will possible to get back on the road to building wealth, securing your retirement and becoming financially secure.

Thanks,

James

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