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Rethinking Risk
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We have already stated that the risk of owning a single stock or bond is that that company or government goes out of business.  The risk of owning a diversified stock or bond portfolio is volatility.

Let's put this into perspective for investors.

The S&P 500 is a popular index composed of 500 of among the largest publicly traded companies in the U.S.  Over time, the S&P 500 has been a proxy for the entire American stock market; meaning that by owning that index you have gotten the performance of the entire U.S. stock market.  In order for the S&P 500 to fall to zero, none of its 500 companies would have any current earnings or any prospect for profits in the future.  Thus, if the S&P 500 were to fall to zero, America is out of business. 

Another popular index is the MSCI EAFE.  It is composed of the largest publicly traded stocks in the developed world. Places like Great Britain, Japan and Australia; big companies that produce products you know and use like Nestle, Toyota, Anheuser Busch Inbev.  For the value of MSCI EAFE to fall to zero, none of its companies would have any current earnings and no prospect for profits in the future.  This is Armageddon.

As long as you think America will be around in the future, the S&P 500 is a decent place to invest your long term money.  Unless you think doomsday is approaching, MSCI EAFE is a reasonable way to invest your long term money.

If we thought the world were going to end...  what would we do?  Spend every dime and max out every credit card!  When you are drowning in debt, failing to build an Emergency fund and not investing for the future...  you are living like there is no tomorrow.   Which is a lot scarier than investing in stock and bond-based mutual funds.

The world does not end very often.  Chances are you are going to spend a lot of time in the present and a lot of time in the future.  The trick is to strike the right balance between them both.

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