How to invest

Every situation is different

I tend to live in the future, perhaps too much so. I am constantly making plans and thinking about different options.

My financial and professional situations seem to be heading for some changes, so I have been poring over spreadsheets for the last couple of weeks (to be honest, at least some of that is procrastination!).

I also started reading Ben Carlson’s new book, Everything You Need to Know about Saving for Retirement. It is fairly short, very readable, and full of principles rather than details. I will definitely be adding it to the site reading list.

In the book, Mr Carlson discusses the factors affecting how people invest:

“Your ability to take risk involves your time horizon, liquidity constraints, income profile and financial resources. Your willingness to take risk involves your risk appetite. It’s the difference between your desire to grow your wealth and your desire to protect your wealth. Your need to take risk involves determining the required rate of return necessary to reach your goals.“

I found this a very clear way to think about investing, so I had a think about my own situation through this lens.

I am currently able to take risks with my investments, because I don’t think I will need them for at least a couple of decades. I am also still working and saving/investing every month. My living expenses are much lower than my income, so I have a margin of safety there. My wife has her own business and my children have moved out and are independent.

I am also fairly willing to take risks. I am pretty happy investing mainly (exclusively!) in stocks. I believe this will be more volatile but will result in more growth in the long term.

However, I don’t really need to take risk as it is extremely likely we will meet our goals (to have a comfortable retirement where we can live our current life and maybe travel a bit more). This ties in to the idea of quitting while you are ahead, or stopping playing once you have won the game. In practice, we should probably start shifting our portfolio from a high-growth, high-volatility one into a more stable one that contains not just stock investments but also bonds and possibly REITs.

So of the three factors, our investments only match the first two (ability to take risks and willingness to take risks). They do not match the third one.

This mismatch actually shows a slight danger. In the words of Warren Buffett, we are “risking what we have for something we don’t need“. We don’t need to make much more money, but it would be regrettable if we lost a lot of our money, particularly as we get closer to retirement.

How about you? How does your investing strategy stack up against the three factors?

Are you able to take risk? Willing to take risk? And do you need to take risk?

11 Responses

  1. I think we have no choice but to take risks if we invest in the markets because of the current state of the global financial system.
    Central banks are massively expanding the money supply with no sign of letting up. It will take years before quantitative tightening can happen. They are also incapable of raising interest rates. Who can even predict when interest rates will be set by the market again? The consequences of central banking policies are inflated assets, especially stocks. What goes up must come down, so this is not the time to be long-term on stocks. Everyone is taking advantage of the easy money party now, but it can’t last.
    Therefore, the issue for retirement planning now is not taking risks but hedging them. The big risk is another financial crisis which will be much more serious than 2008, so we must take steps to protect the wealth we have.

    1. A quibble; the overall US market has always gone up over time (over time being key). As you said, this is why you hedge and some trades fall by the wayside as the market evolves. You never know what’s going to happen.

      I agree with you on the current interest rates environment and I believe that there’s greater risk in not being in the market which is a bit counterintuitive and I believe unfair. Investing is hard work and it seems immoral that people who want to save their money are punished for it by losing buying power.

      Hedging, hedging, hedging. I think if you’re hedged properly, some of your investments will not be making advances which can be a little non-intuitive when you’re looking at your portfolio. I think. This may be my bad hedging :-).

      I’ve been playing around with a new formula for about a year.
      20% stocks
      20% bonds
      20% REITs
      20% Gold/commodities
      20% Cash

      It’s removed a lot of volatility while providing gains. You can make this extremely simple by just buying large ETFs that align to each allocation or you can get as funky as you want.

      Understanding risk is super important to do before you wade into making purchases. But the same logic applies to anything you buy. That sashimi sitting there at 20% off carries a bit more risk than the one just put into the display.

      1. Well, I subscribed to this site because I want to learn about what steps I should take. Over the past four years, I have mainly invested in precious metals, split evenly between physical metals (gold along with some silver and platinum) and mining stocks (silver and gold majors and a few mid-tiers). At the same time, I have stepped up the pace of paying down my mortgage with the goal of full home ownership in three years. My strategy has been simple so far, but I am not sure what to do going forward, especially since the global economy is sailing in uncharted waters.

        1. Thanks very much. Small business failing while the US markets reach new highs but at the same time the USD falling against the JPY. Confusing for me.

          1. It’s important to remember that the stock market is determined by sentiment in the short term and performance in the long term. In the short term there can be little connection between the economy and stock market prices.

          2. Failing small businesses represent the real economy; the ongoing stock market highs indicate the imbalances in the financial system caused by central bank policies. The huge and steady liquidity injections by the Fed have brought interest rates down, reducing returns on bonds and treasury bills. Therefore, investors have been seeking higher returns in the stock market, and all of that money moving in has been driving up stock prices. Meanwhile, companies can boost their stock prices through buybacks funded by low-interest loans. Regarding the USD to JPY, I would guess the steady fall since March partially reflects the inept response to COVID in the US. In comparison, the Canadian dollar has been gaining against the yen since its drop in March, and Canada’s COVID response was much better than its southern neighbor.

  2. I believe that I am able to take risks and am willing to. As you mentioned as well, I have time on my side with 15-20 years before I hit my retire early number. Even though I feel I am able to take risks, I don’t invest aggressively into the stock market. I tend to overthink a lot and as Ax6is mention in their comment, understanding risk is important and I tend to spend a lot of time in that stage before making purchases, if any!

    1. I started writing down my thesis for making an investment which allows me to go back to the thesis to understand why did or why will I purchase something. It’s helped me and I wish I did it long ago (especially when trades were expensive!). Example thesis could be: end of COVID, raising inflation, energy recovery, etc.

  3. I am also far from my retiring age target so I invested even more this year taking advantage of the drops in March. I will continue to stick to the plan to invest in a balance portfolio with bonds, REITs and paying back loans. I am not forgetting to enjoy also with a nice restaurant or by learning something to nourish my mind. I have more stocks than what I should but this is because I started to invest at a late stage. I was too much conservative when I was younger. My plan is to shift gains in volatile assets to more secure assets as I get older.