Money Magazine's big headline this month is the 7 New Rules of Financial Security... and Why You Need to Know Them. I have to admit it's a pretty sweet headline - it certainly caught my eye. I flipped right to page 50 to see what I needed to know why. With that in mind, let's take a look:
Old thinking: If you can stomach the ups and downs that come with risk, you'll be rewarded.
New rule: Risk isn't about your stomach. It's about making or missing an important goal.
Money Summary: - Money notes that it becomes much more difficult to retire when you reach a bad stretch in the market. The money you have left over is not enough to build up to where it was. Since you aren't likely adding new money in retirement, you can't capitalize on cheap stocks. "This bear market's lesson is... only risk how much you can lose and still meet your basic goals."
Lazy Man's Take:
I didn't think it was new to only risk what you can lose. I thought that was a universal truth. I see people go into casinos with this mentality all the time (unfortunately not 100% of the time). I agree that it makes sense to bring down your risk exposure as you near retirement. However, the new question is how much? Previous philosophy said that even at age 65, you still may have 15-30 years left, so you need to make your money stretch that long. That requires risk exposure.
Perhaps part of that answer is diversified income streams? Don't put all your eggs in the equity markets, but have a rental property as well? Perhaps build some businesses that deliver cash flow that can be used in retirement. I don't know if this website will be around in 35 years (I hope so), but there's a chance it could get me through some lean years. Just don't look into selling MonaVie.
Old thinking: Keep enough money in ultrasafe accounts to cover life's emergencies, but no more.
New rule: Relying more on cash can rescue you in an "asset emergency."
Money Summary: - The old emergency fund needs to be re-evaluated. Instead you need to look at big potential future purchases in the next three years: "tuition, wedding, down payment on a house."
Lazy Man's Take:
I think this is fairly basic knowledge as well. That's why they have 529 plans that re-adjust with the child's age to reduce risk. It's really not much different than the previous rule except it's not focused on retirement. They could have just as easily said here, "don't risk what you can't lose." I hate to be all bah humbug here, but in an emergency situation weddings can take a back seat. Also, I know few people who need to buy a house. Know what you are risking, and if you are risking too much than know you may have to cut back.
Old thinking: The longer your time horizon, the more stocks you should own.
New rule: Time isn't everything. You must also consider your earnings potential.
Money Summary: - Think about your job security as part of your overall risk profile.
Lazy Man's Take:
This is sound advice that I don't often hear. My wife has the near equavalent of tenure at her job. It's allowed us to be a little more risky than we might have been. I've been able to take some time off and work on building other businesses. Put another way, if you are going to be in a band and have a hit song, you might want to put a pile of that money in a safe place in case your the next Soft Cell.
Perhaps this goes back to Rule #1 and diversifying your income streams. You don't want to be completely dependent on equity markets. In my personal life, I found that someone is willing to value my human capital more than my side businesses, so I switched back to take advantage of that situation. Six months from now, it may be different and I'll go back to building out my side businesses more and more.
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