Investors Stick a Toe or Two Back in the Water

Washington Matters

Investors Stick a Toe or Two Back in the Water

Investors' tolerance for risk didn't die in last year's financial meltdown. It was just hibernating. Today, workers are once again contributing to 401(k)s, and investors big and small are putting more of their savings into stocks  The SP 500 is up about 45% from its lows in March, and it's still rising. Plus better-than-expected home sales and prices mean buyers are stepping in.


Why the awakening?


Certainly, a sense that markets have hit bottom is a major factor. No one wants to be left on the sidelines where they'll miss out gains.

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But other factors are also in play. A big one is stricter oversight. Congress, federal regulators and even the financial institutions themselves have created a new environment with rules that bolster confidence, letting consumers sleep better at night.


Another reason: the dearth of alternatives. In a competitive culture, next-to-nothing returns on risk free investments won't cut it for long. Investors of all stripes need more to keep pace with their growing wants and needs or to make up lost ground.                                           


But there's a problem: It's harder than ever to minimize risk today. The warp speed of technological change and its effect on business models and financial markets make anticipating and avoiding perils very hard indeed. Examples abound: Publishers thought they had the Internet figured out until advertising stumbled in the economic downturn and social networking stole their online thunder. Few understood the scope and implications of derivatives trading until AIG and Lehman Brothers came undone, bringing financial markets to disaster's edge.


Buy-and-hold investing is no longer as safe. A paradigm-shifting change can pull the rug out from even the most stalwart, sure-footed corporate giant. And you can't count on spotting the next new thing to take off.


But you can be open to new ideas and recognize the risks you choose to take. The trick is to find a balance -- the right cocktail of risk and reward -- for you.