One lesson learned from the global financial crisis is that the markets we invest with, and we trust to be regulated and efficient, are possibly not worthy of our investment and trust. Since there are no other markets for investing, and interest rates available to savers are lower than inflation (hence savers will lose purchasing power/money), what do you do. If your answer is do what I've always done because it will get better, you may be the answer to the rhetorical question "who is the bigger fool".
It is essential someone understands the risk your investment capital is exposed to. In a previous post, risk was discussed in more depth, to explain the concept. One of the points found in that post is for investors to understand the probability of negative or positive outcomes. Think of investing from the perspective of gambling centers such as Las Vegas, Macau or Monte Carlo. When you arrive in town, you become a number in a statistical formula that attempts to predict the odds for where you will spend your cash and how much you of your cash you will leave with. What do you understand about the ways to spend or keep your money in their town? What do you understand about how to increase your cash while playing in their town with their games and their employees?
With that background, here is a set of questions to help identify what kind of investor you are. In the imaginary game, you can potentially make 100% or lose 70%, after all of your bets are settled and you leave the game. The average earnings of all players, and all types, is 8%. The most frequently observed range of earnings is between 28% and -12%. You have disposed of all objections to betting or gambling so that you can use this survey objectively.
A. What percent of your cash are you willing to place on the table when the game is one you understand thoroughly and play often enough to be knowledgeable?
B. What percent of your cash are you willing to place on the table
when the game is one you understand thoroughly and play, but not often enough to remain knowledgeable?
C. What percent of your cash are you willing to place on the table when the game is one you understand in concept and play enough to be familiar with the rules?
D. What percent of your cash are you willing to place on the table when the game is one you understand in concept and play, but not enough to be
familiar with the rules?
E. What percent of your cash are you willing to place on the table when the game is one you do not understand in concept and play for fun when someone else understands the rules?
F. What percent of your cash are you willing to place on the table when the game is one you do not understand in concept and play just for fun without understanding the rules?
Based on your response to this survey, you or your advisor can create an appropriate-for-you asset allocation, based on your recognition of risks. Identifying risk as a probability of future events is not the outcome in Modern Portfolio Theory (MPT), standard deviation, beta and other conventional tools used in MPT.