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Makin' Money

What are you? A stock? A bond? Something else?

Chris Farrell Jan 3, 2012

Is it a “good riddance to 2011” rally on Wall Street? The Standard & Poor’s 500 stock market index has been up sharply in the first trading day of the New Year. It’s as good an explanation as any.

Where to invest? It’s always a difficult question to answer, but this year it seems harder than usual to get enthusiastic about risking money in any investment. Of course, in the past investor enthusiasm often turned out to be wrong. But at least there was a compelling reason or story behind the investment choice. Not this time.

Gold? It’s had an incredible run, but it’s hard to see it gaining more with all the radio and TV spots calling for your unwanted gold jewelry. The stock market? It has been on a miserable run. The S&P 500 returned a mere 2.11 percent over the past 12 months. The stock market will do better at some point, but the risks are all too apparent with the uncertainty surrounding the viability of the Eurozone and fiscal paralysis in Washington.

The government bond market has put on a stunning performance. Long-term U.S. Treasuries returned 29.93 percent over the past 12 months, measured by the Barclays U.S. Aggregate Government Treasury Long Bond index. Yet with current yields so low, all the risk is on the downside. A terrific analysis of the investor’s dilemma is an article by Fortune’s savvy columnist Allan Sloan: Where should you put your money? These days, that’s a tough one.

The uncertainty is unavoidable. But you can come to a more reasoned decision by starting from a different place than typical market history and investing insight. Forget about stocks, bonds and other assets for now. Instead, think about your job and your career.

Does your income fluctuate a lot or is it fairly stable? How vulnerable or secure is your job. Put somewhat differently, are you a stock or a bond? (It’s also the title of a book by Moshe Milevsky, professor at York University.)

The riskiness or security of your income and job should strongly influence your investment choices. For example, a tenured university professor has incredible job security and, therefore, can afford to invest more in riskier assets like stocks. In sharp contrast, a freelancer’s income fluctuates a lot over the years. Job security is an oxymoron. Freelancers should invest a greater percentage of long-term savings in less risky assets — such as bonds and cash — to offset the income volatility.

Time is also a critical variable: When will the bill come due? The shorter the time period, the more you should pick less risky investments, and vice versa. Let’s say the college tuition bill looms in 4 to 5 years. It doesn’t really matter if you’re optimistic about stocks at that point. What matters is that time is short. You want to get more conservative with the money so it will be there when you need it.

Most of us have a better grasp of the risks and rewards embedded in our job and career choices, as well as the time we have before we have to pay the bill, than we have about the possible trajectory of stock and bond returns. I’m not saying it’s always easy. Life throws us all a curveball now and then.

Nevertheless, starting from the rhythms of your everyday life and then choosing investments is a better path than the standard Wall Street prediction game.

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