Market Risk; Are you overexposed?

Rereading some of the classics of investing advice,  one thing comes through loud and clear.  Don’t overexpose yourself to the stock market.  But of course that is exactly what people have done.  Encouraged to invest in mutual funds inside of their 401Ks, they usually have a vast majority of their non-real estate wealth riding in the stock market.  This is a huge mistake for both psychological reasons and functional reasons.

If you only have half your savings riding in the market, you are less likely to panic and do things that will hurt you going forward.  You are less likely to concentrate on market losses and more likely to be able to make rational buy and sell decisions.  Now currently there are many folks out there determined to convince folks the economic system is failing and at the same time there are folks who are convinced that the recession is over.  Neither of these attitudes are likely to be correct.  But if you are fearful for all your savings you are much more likely to glob onto these fantasies!  The truth is somewhere in between.

The other issue is that by having so much of your savings in the market you try to lower risk [like buying diversified mutual funds] instead of looking for opportunities to really make money.  In essence, by lowering the amount of savings  in the market, you can become more active in searching for opportunity without fear of total ruin!  As regular readers know, I encourage folks to become actively involved in their investments and this forces one to do that.  You also increase your ability to become one of those Coca Cola millionaires that I met in South Georgia back in the day or a Microsoft millionaire or a Berkshire Hathaway millionaire, etc.

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