In 1519, Hernando Cortes, beached on the shores of unexplored Mexico, made a fateful decision: he would burn the ships he and his men arrived in and attempt to overthrow Montezuma and the mighty Aztec empire. The decision was risky. The Aztecs were meant to possess large numbers of brave warriors while Cortes had only a handful of men. If Cortes had the slightest setback there would be no escape. On the other hand, Cortes had no choice. The powerful Governor of Cuba wanted his head. Cortes had defied the Governor time and time again and his best option for getting out of the situation was to win favor with King Charles by conquering a civilization rich in gold and other treasures. Since Cortes’ men might get a little antsy if the going got rough and decide they would prefer going home, Cortes decided it would be best to completely align their incentives with his. He did this by burning the ships. Anything but success would now equal death for Cortes and all of his men. Thus began the famous march from Vera Cruz to Tenochtitlan.
Your retirement is not the conquest of New Spain. All or nothing plays, though they can be wildly successful and can lead to conquistador like splendor, are not the kinds of risks you should be taking with your future. Putting all of your savings into a single speculative venture should be reserved for situations when there is truly nothing to lose.
When investing for the future you should take a much longer view of things. You should understand that the economy undergoes boom and bust cycles, fads come and go and sometimes you just plain get unlucky. To combat the vicissitudes of fortune you must diversify your investment holdings.
A lot of people go about their savings in a very simple way: they have their employer take money out of their paycheck and put it in a 401(k) plan. This is a good, tax advantaged way to save. The problem often comes, however, when the employee falls prey to the employer’s siren song of re-investing in the company. Perhaps the company has been doing well lately and the employee is bullish on the future success of the company. He or she then goes ahead and contributes 100% of his 401(k) to purchasing company stock. That is a potentially disastrous decision.
Most people’s livelihoods are not well diversified. For the most part people rely on their employer for their future well being. Your employer supplies your paycheck, you are counting on your employer for wage increases and you may also be expecting a nice little pension when you retire. That is already a lot of eggs in one basket. Companies fail suddenly, layoffs occur and you do not always have the meteoric rise in your career that you might hope for.
To subject your savings to the fortunes of the company that you already are so dependent upon is something you should do only after careful consideration of all the alternatives. It might be the right thing to do, but you are taking on a lot of risk in doing it.
So if you aren’t doubling down on your company’s future, what should you be doing with your retirement savings? The answer obviously depends on where you are in your life. When you are younger you can take a few more risks in life. Your portfolio should be weighted towards slightly riskier assets rather than stable, income producing assets. As you get older the mix should change until you reach a point in life where, finally, your portfolio consists of mostly income producing assets.
This is not carte blanche to go on a wild stock-picking adventure with your retirement money while you are young. You should leave that to the pros. There are people who dedicate their lives to learning the art of investing. These people study The Intelligent Investor like it was a bible. They pore over annual reports and study where Warren Buffet went to lunch that day in an attempt to glean a precious new piece of information. If this profile does not sound like you, stay away from stock-picking. Even the pros have a hard time beating the market and they have advantages that you can never hope to have on your side.
Sure you can gamble a little bit of money on that hot stock your cousin told you about, but think of it the same way as putting a pile of money on red at the roulette table: odds are you are going to lose your money, but, hell, you might get lucky and win.
For proper long term planning, concentrate on finding a mutual fund that has a nice track record, low fees and a good rating from a reputable publication like Morningstar. If you want to make a bet on the growth of America, buy an S&P 500 index fund. For a little extra diversity, maybe research an international or emerging markets fund and put some money there. As long as you stay away from French companies, you should be fine.
Seneca Spade learned about the wonders of diversification after losing way too much money on a hand of blackjack. He is an investment specialist and contibuting editor for whatbubble.com. If you would like to post your own comments, have any financial questions answered by an expert for free, or would like to read more on this subject please visit http://www.whatbubble.com, If you wish to re-publish this article, we request you retain all links and copy including this bio.
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