How much money do you currently have in the market? All of it? 50% 80%? Did you make a conscious decision to have that particular percentage exposed to market risk? How did you decide stocks, mutual funds, ETFs, bonds, annuities, or maybe a professionally managed wealth management account? Or… Did it just sort of happen?
Why would I be asking this question? I say it all the time, markets go up, and the markets go down. So how much of your life savings/retirement is exposed to market risk is a very important consideration. That is why I strongly encourage everyone to think of their money in terms of red money, and green money.
Now, those terms might sound a little childish or funny, but I believe they help us understand a very important concept. Let me explain. Red money is money that we are willing to expose to market risk, and we are willing to do this in hopes of a higher return. We accept the possibility of losses even significant losses in hopes of greater gains. Red money is exposed to upside, and downside market risk. Now green money is about safety and security. With green money, we are not willing to accept the risk of losses. So we’ are willing to accept a lower return in exchange. Green money does not have downside market risk. So if red money is exposed to upside, and downside, and green money has only upside, which one is better?
That is probably the wrong question to be asking, because neither one is inherently good or bad. It all depends. The very important questions we should be asking ourselves are these, what percentage of my money should be in red money? And what percentage of my money should be in green money?
Now, if you are at or near retirement, you should ask yourself if any of your money should be in red money? Can you afford to lose any of your retirement funds? Would you rather take two steps forward and three steps back or just take one step at a time and never take a step back?
Hear the rest of my thoughts and listen to the Smart Money podcast below.
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