Monday, November 5, 2007

Investing and the perception of risk

Money Smart Life has an interesting post today on extreme investing. Basically, the idea is that you take a small portion of your investable assets, money that you are willing to lose, and invest outside your usual comfort zone. The key here is that everyone's comfort zone is different, so this doesn't mean making margin trades on penny stocks for everyone; rather, take your "extreme" money and use it to try a new kind of investment.

This post got me thinking about the recent change in my own investment "strategy". For the last seven years, all of my invested money has been in my employer's stock. I didn't feel that I understood enough about investing to make smart choices in allocating my investments, so I left the money in the stocks (two stocks because I've had two employers). It wasn't until September that I sold the stocks and purchased index funds, coming up with something resembling a real asset allocation. It took a lot of hemming and hawing to make this switch, but I'm happy with the result.

The irony, of course, is that I was thinking of this switch in asset allocation as somewhat risky, when in fact I was significantly reducing the risk in my portfolio. I've gone from being invested in exactly two stocks to owning five index funds. I still may not have the ideal allocation, but my eggs are now spread across several baskets, which is a nice feeling.

I just found it amusing that my "bold move" served to diminish my risk. Extreme? maybe not. But I'm sleeping better now.

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