Devoted to understanding the basics and fundamentals of investing

Lynn observes that he is older and cannot afford to be in risky positions.  This relates to time horizon or holding period for investments.

In some of my early posts, I noted that the longer you have to hold a security, or stock, the more likely you are to earn the expected return.  The shorter your anticipated holding period, the more likely you are to experience a return away from the median of the standard normal curve of returns. 

The implication of these facts is that the shorter your holding period, the more conservative your investment strategy should be.  You can lower your risk in several ways.

1. Move equity (stock) exposure to lower beta sectors.  The market has a beta of 1, an expected return of 10% to 12% and a volatility of roughly 20% to 25%.   If you invest in stocks with a beta of 0.8, you lower your risk by 20%.
2. You can lower your holding of stocks and invest a greater percentage in bonds or cash.  This will lower the overall volatility of your portfolio.
3. You can increase the average dividend of your portfolio by investing a greater percentage of your holdings in dividend paying stocks.  This reduces their volatility.
4. You can shorten the duration of your bond portfolio.

The problem with these risk lowering strategies is that they also reduce expected portfolio returns.  You have to absorb enough risk to earn the returns you need to live on.  It is a delicate balance to find.