One sensible way to reduce overall risk is to pay down high-interest debt, like credit cards or private student loans. That, at least, offers a guaranteed return, since every extra dollar you pay now keeps you from having to pay more interest later. Also, the sooner you rid yourself of debt payments, the less you would need in your monthly budget if you lost your job.
So what kind of risk should you take on with the savings you have left over? To Moshe Milevsky, the author of Are You a Stock or a Bond?, risk should have less to do with the era in which you live and more to do with what you do for a living.
If you are a tenured professor, a teacher, a firefighter or other government employee, you have better job security than most other people. Your income stream is stable, like a bond. Certain service providers, like plumbers and doctors, have similar security.
Investment bankers and many technology and media workers, however, have more volatility in their career paths. A chart of their income might bounce around like one showing a stock’s price.
As a tenured professor, Milevsky invests entirely in equities. Other people with bond-like characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stock-like careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.
For most young people, however, their biggest asset is not a 401(k) account or a home but the trajectory of their career and the value of 20, 30 or 40 years of future earnings. So whether you are taking on too much risk right now or not, all of that money will provide many more chances to fix any mistakes you have already made.
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