Live It Up Without Outliving Your Money!: Getting The Most From Your Investments in Retirement

Chapter 10. Controlling Risks

Trust in Allah, but tie your camel.

—Arab proverb

A recurring theme throughout this book is risk, and finally the topic gets its own chapter. I haven't consolidated every part of the risk discussion into one place because it is a topic that needs to be brought up again and again. I hope you'll get used to thinking of it as an integral part of investing. In this chapter we move from risk as an abstract concept to risk as a cold, hard reality with specific numbers. There's no perfect way to know in advance precisely what level of loss you can tolerate, but there are numerous ways to help you get a handle on it.

One of the most important things we do in our company is interview investors about their risk tolerance. We use a series of questions to help us to get an authentic look at how each person deals with adversity. In some cases we ask the same question more than once, just in different ways.

Ultimately, it's necessary to get specific about making the trade-offs between risk and expected return. In workshops and with clients, we use a table of numbers to show the results (in the past, because that's all we have) of various combinations of equity funds and fixed-income funds, each with its own set of returns and risks.

With this table, an investor who has carefully thought about his needs and risk tolerance can choose a combination of investments that's likely to provide the right combination of growth and comfort.

In many years of counseling individual investors, ...