How to Think Smarter About Risk; Too many investors may be taking big chances with their money because they aren't considering the most important asset of all: themselves
Author: Moshe A. Milevsky</br></br>Sit back for a moment and ponder something unpleasant: How would a large, sustained drop in the stock market affect your personal finances? More specifically, imagine the Dow Jones Industrial Average hitting 6500--its March 2009 level--and staying there.</br></br>I suspect that most of you are thinking about the wretched blow this would deal to your retirement savings and stock portfolio. And it no doubt would. But here's my advice: Think more broadly. Most important, think about how such a drop would affect your paycheck and your career.</br></br>It will depend on the person, of course. Earnings in some professions are tightly linked to the stock market--an investment banker, say, or portfolio manager or financial adviser--while others, such as hospital nurses or tenured professors, are relatively immune to these zigs and zags. Most people will fall somewhere in between.</br></br>Consider this an exercise in personal risk management. It isn't intended to gauge whether you believe the stock market will test those levels again, and I'm not asking whether you are bullish or bearish. That is not what personal risk management is about, even if it is how most people practice it. The issue here is: If the bear returns for a prolonged visit, regardless of your subjective view of these odds, how would it affect your current and future earning power? And--more important--are you properly considering it when creating your investment portfolio?