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Use What You Can Lose

Walk into the market like this & you might stand in the soup line like this too.

It’s not only a neat rhyming phrase, it is a rule of thumb that you should consider employing if you aren’t already.  Use that you can lose is simple in philosophy, but abundant in knowledge.    

The idea is that you should invest money with the understanding that you can and may lose it all.  Another way to think of it is that there is no sure thing, so don’t invest everything.  Keep a savings outside of the market.    

Start out with plain vanilla

Yes, it is boring, and yes it does take patience, but you must establish a savings before you jump head-first into the stock market, or any other potentially risky investment vehicles.  What is a mansion if it has no foundation?  You should always have a savings in a plain vanilla account.    

Yes, you’re yield will suffer, but you must have stability under you to invest properly.  If it kills you too much to toss it into a savings account then look at money market accounts (MMAs) or look at CDs with the understanding that you may need to take the penalty to get some money out.    

If you stray away from a plain old savings account then you should have a very strong understanding of how long it will take to liquify that money in the event that you need it.  You should also understand all of the fees that you may incur if you withdraw early.  Additional Reading:    

Don't Be A Baby, Exhibit Some Patience! via Flickr.com

But I Want My Yield Now!

Yep, and I want my Ferrari yesterday, but the world has fundamentals, and disregarding the fundamentals will get you in trouble quickly.  I don’t care how much faster you can get across the street if you don’t look both ways and run for it, you must weigh the risks.    

The markets as a whole have a decent yield track record over the long run, but many investors get destroyed in the short run.  I know that the Apple stock looks attractive, but a kid doesn’t consider if your portfolio is in the red before they break their arm.    

If all of your savings is in the market, then you better be prepared to sell some stock at an extremely inopportune time to cover a surprise expense.  And allow me to point out that selling when you don’t want to is almost always inconvenient.  I say this for two reasons: if you’re down, then you take a loss, and if you’re in the middle of a run-up, then you lose potential profit.    

This Is Too Conservative

I apologize in advance, this section is extremely serious. We still haven’t learned our lessons yet about extreme risk, and I want to address this right now because extreme risk is still in vogue.  If this sounds too conservative then you’ve been brainwashed by wall street.  People have lost so much on extreme risk, that it seems they are taking even bigger risks to get back what they lost.    

Like an addict at a slot machine, sometimes it is more profitable to cut your losses.  When you’ve got a family depending on you, risking your entire savings isn’t heroic, noble, or an adrenaline rush; it’s just extremely irresponsible.  And if your reasoning for taking such risk is because “you’ve got everything under control” then allow me to remind you of how little control you actually have:    

A lot of people thought they had things under control, a lot of people thought their families’ savings were safe, a lot of people thought they had control over when they were going to retire, but almost all of them were wrong. So yes, this method is a bit more conservative than a lot of people might want, but look where unnecessary risk has gotten us so far.    

We’ve got the largest debt that we’ve ever had, a housing market on life support, markets at levels not seen in a decade and unemployment rivaling the great depression.  So while it might not be as cool to be conservative, at least you won’t lose the farm.  A solid, safe savings before investing is ALWAYS a good idea.

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