A big divide in how we manage our money is whether we see ourselves as a risk-seeking money manager or a risk-averse buyer of insurance.
Of course, who doesn't want to be known as a risk seeker? It's cool. The Wall Street marketing machine and investment commentary stokes that self image. From the 401(k) literature to mutual fund brochures, finance marketers subtly and not so subtly assume that you're a risk-accepting, wealth-creating manager of your savings. Think stocks.
The tactics of the risk-avoiding buyer of insurance is, well, boring, right? It's left for the proverbial widows and orphans of society. Think Treasuries. In this article for Kiplingers, I explore why an insurance mindset is a far richer framework for managing money over a lifetime for most of us. The goal is to limit downside risk rather than to reach for riches.
The starting point for constructing such a portfolio isn't the long-term expected return on various financial assets. Rather, it begins with the prospects for your job and your career over a lifetime. Stocks are too risky to be the core portfolio investment of the average worker, proponents say, even if held for the long haul. In essence, with this framework the goal is to ensure that your standard of living won't fall below a certain level in old age. Risk becomes loss.
If you want to learn more about the idea and its practical application, you should check out a new book: Risk Less and Prosper: Your Guide to Safer Investing.
It's by Zvi Bodie, a finance professor at Boston University, and Rachelle Taqqu, a certified financial analyst.
What I like about the insurance framework is that it takes seriously the idea that how you save and where you save is all about what you want out of life -- your goals, your desires, your values, your lifestyle. The focus is on matching incomes and savings with the timing and costs of goals.