When the market crashes, should I sell bonds and buy equities for the inevitable recovery?
When the market moves significantly, you should rebalance your investments to maintain the diversification ratios you have selected. That means if bonds go up and stocks go down, you sell bonds and buy stocks (to some degree), and vice versa. Sell high to buy low, and remember that over the long run most things regress to the mean. "The problem with the proposed plan is the word ""inevitable"". There is no such thing as a recovery that is guaranteed (though we may wish it to be so), and even if there was there is no telling how long it will take for a recovery to occur to a sufficient degree. There are also no foolproof ways to determine when you have hit the bottom. For historical examples, consider the Nikkei. In 2000 the value fell from 20000 to 15000 in a single year. Had you bought then, you would have found the market still fell and didn't get back to 15k until 2005...where it went up and down for years, when in 2008 it fell again and would not get back to that level again until 2014. Lest you think this was an isolated international incident, the same issues happened to the S&P in 2002, where things went up until they fell even lower in 2009 before finally climbing again.  Will there be another recession at some point? Surely. Will there be a single, double, or triple dip, and at what point is the true bottom - and will it take 5, 10, or 20+ years for things to get back above when you bought? No one really knows, and we can only guess.  So if you want to double down after a recession, you can, but it's important you not fool yourself into thinking you aren't greatly increasing your risk exposure, because you are." "In a comment you say,  if the market crashes, doesn't ""regress to the mean"" mean that I should still expect 7% over the long run? That being the case, wouldn't I benefit from intentionally unbalancing my portfolio and going all in on equities? I can can still rebalance using new savings. No.  Regress to the mean just tells you that the future rate is likely to average 7%.  The past rate and the future rate are entirely unconnected.  Consider a series:   The running average is  That running average is (slowly) regressing to the long term mean without ever a member of the series being above 7%.   Real markets actually go farther than this though.  Real value may be increasing by 7% per year, but prices may move differently.  Then market prices may revert to the real value.  This happened to the S&P 500 in 2000-2002.  Then the market started climbing again in 2003.  In your system, you would have bought into the falling markets of 2001 and 2002.  And you would have missed the positive bond returns in those years.  That's about a -25% annual shift in returns on that portion of your portfolio.  Since that's a third of your portfolio, you'd have lost 8% more than with the balanced strategy each of those two years.   Note that in that case, the market was in an over-valued bubble.  The bubble spent three years popping and overshot the actual value.  So 2003 was a good year for stocks.  But the three year return was still -11%.  In retrospect, investors should have gone all in on bonds before 2000 and switched back to stocks for 2003.  But no one knew that in 2000.  People in the know actually started backing off in 1998 rather than 2000 and missed out on the tail end of the bubble.   The rebalancing strategy automatically helps with your regression to the mean.  It sells expensive bonds and buys cheaper stocks on average.  Occasionally it sells modest priced bonds and buys over-priced stocks.  But rarely enough that it is a better strategy overall.   Incidentally, I would consider a 33% share high for bonds.  30% is better.  And that shouldn't increase as you age (less than 30% bonds may be practical when you are young enough).  Once you get close to retirement (five to ten years), start converting some of your savings to cash equivalents.  The cash equivalents are guaranteed not to lose value (but might not gain much).  This gives you predictable returns for your immediate expenses.  Once retired, try to keep about five years of expenses in cash equivalents.  Then you don't have to worry about short term market fluctuations.  Spend down your buffer until the market catches back up.   It's true that bonds are less volatile than stocks, but they can still have bad years.  A 70%/30% mix of stocks/bonds is safer than either alone and gives almost as good of a return as stocks alone.  Adding more bonds actually increases your risk unless you carefully balance them with the right stocks.  And if you're doing that, you don't need simplistic rules like a 70%/30% balance."
I think your premise is slightly flawed. Every investment can add or reduce risk, depending on how it's used. If your ordering above is intended to represent the probability you will lose your principal, then it's roughly right, with caveats. If you buy a long-term government bond and interest rates increase while you're holding it, its value will decrease on the secondary markets. If you need/want to sell it before maturity, you may not recover your principal, and if you hold it, you will probably be subject to erosion of value due to inflation (inflation and interest rates are correlated). Over the short-term, the stock market can be very volatile, and you can suffer large paper losses. But over the long-term (decades), the stock market has beaten inflation. But this is true in aggregate, so, if you want to decrease equity risk, you need to invest in a very diversified portfolio (index mutual funds) and hold the portfolio for a long time. With a strategy like this, the stock market is not that risky over time. Derivatives, if used for their original purpose, can actually reduce volatility (and therefore risk) by reducing both the upside and downside of your other investments. For example, if you sell covered calls on your equity investments, you get an income stream as long as the underlying equities have a value that stays below the strike price. The cost to you is that you are forced to sell the equity at the strike price if its value increases above that. The person on the other side of that transaction loses the price of the call if the equity price doesn't go up, but gets a benefit if it does. In the commodity markets, Southwest Airlines used derivatives (options to buy at a fixed price in the future) on fuel to hedge against increases in fuel prices for years. This way, they added predictability to their cost structure and were able to beat the competition when fuel prices rose. Even had fuel prices dropped to zero, their exposure was limited to the pre-negotiated price of the fuel, which they'd already planned for. On the other hand, if you start doing things like selling uncovered calls, you expose yourself to potentially infinite losses, since there are no caps on how high the price of a stock can go. So it's not possible to say that derivatives as a class of investment are risky per se, because they can be used to reduce risk. I would take hedge funds, as a class, out of your list. You can't generally invest in those unless you have quite a lot of money, and they use strategies that vary widely, many of which are quite risky. "Index funds can be a very good way to get into the stock market. It's a lot easier, and cheaper, to buy a few shares of an index fund than it is to buy a few shares in hundreds of different companies. An index fund will also generally charge lower fees than an ""actively managed"" mutual fund, where the manager tries to pick which stocks to invest for you. While the actively managed fund might give you better returns (by investing in good companies instead of every company in the index) that doesn't always work out, and the fees can eat away at that advantage. (Stocks, on average, are expected to yield an annual return of 4%, after inflation. Consider that when you see an expense ratio of 1%. Index funds should charge you more like 0.1%-0.3% or so, possibly more if it's an exotic index.) The question is what sort of index you're going to invest in. The Standard and Poor's 500 (S&P 500) is a major index, and if you see someone talking about the performance of a mutual fund or investment strategy, there's a good chance they'll compare it to the return of the S&P 500. Moreover, there are a variety of index funds and exchange-traded funds that offer very good expense ratios (e.g. Vanguard's ETF charges ~0.06%, very cheap!). You can also find some funds which try to get you exposure to the entire world stock market, e.g. Vanguard Total World Stock ETF, NYSE:VT). An index fund is probably the ideal way to start a portfolio - easy, and you get a lot of diversification. Later, when you have more money available, you can consider adding individual stocks or investing in specific sectors or regions. (Someone else suggested Brazil/Russia/Indo-China, or BRICs - having some money invested in that region isn't necessarily a bad idea, but putting all or most of your money in that region would be. If BRICs are more of your portfolio then they are of the world economy, your portfolio isn't balanced. Also, while these countries are experiencing a lot of economic growth, that doesn't always mean that the companies that you own stock in are the ones which will benefit; small businesses and new ventures may make up a significant part of that growth.) Bond funds are useful when you want to diversify your portfolio so that it's not all stocks. There's a bunch of portfolio theory built around asset allocation strategies. The idea is that you should try to maintain a target mix of assets, whatever the market's doing. The basic simplified guideline about investing for retirement says that your portfolio should have (your age)% in bonds (e.g. a 30-year-old should have 30% in bonds, a 50-year-old 50%.) This helps maintain a balance between the volatility of your portfolio (the stock market's ups and downs) and the rate of return: you want to earn money when you can, but when it's almost time to spend it, you don't want a sudden stock market crash to wipe it all out. Bonds help preserve that value (but don't have as nice of a return). The other idea behind asset allocation is that if the market changes - e.g. your stocks go up a lot while your bonds stagnate - you rebalance and buy more bonds. If the stock market subsequently crashes, you move some of your bond money back into stocks. This basically means that you buy low and sell high, just by maintaining your asset allocation. This is generally more reliable than trying to ""time the market"" and move into an asset class before it goes up (and move out before it goes down). Market-timing is just speculation. You get better returns if you guess right, but you get worse returns if you guess wrong. Commodity funds are useful as another way to diversify your portfolio, and can serve as a little bit of protection in case of crisis or inflation. You can buy gold, silver, platinum and palladium ETFs on the stock exchanges. Having a small amount of money in these funds isn't a bad idea, but commodities can be subject to violent price swings! Moreover, a bar of gold doesn't really earn any money (and owning a share of a precious-metals ETF will incur administrative, storage, and insurance costs to boot). A well-run business does earn money. Assuming you're saving for the long haul (retirement or something several decades off) my suggestion for you would be to start by investing most of your money* in index funds to match the total world stock market (with something like the aforementioned NYSE:VT, for instance), a small portion in bonds, and a smaller portion in commodity funds. (For all the negative stuff I've said about market-timing, it's pretty clear that the bond market is very expensive right now, and so are the commodities!) Then, as you do additional research and determine what sort investments are right for you, add new investment money in the places that you think are appropriate - stock funds, bond funds, commodity funds, individual stocks, sector-specific funds, actively managed mutual funds, et cetera - and try to maintain a reasonable asset allocation. Have fun. *(Most of your investment money. You should have a separate fund for emergencies, and don't invest money in stocks if you know you're going need it within the next few years)." A falling $AUD would be beneficial to exporters, and thus overall good for the economy. If the economy improves and exporters start growing profits, that means they will start to employ more people and employment will increase - and with higher employment, employees will become more confident to make purchases, including purchasing property. I feel the falling $AUD will be beneficial for the economy and the housing market. However, what you should consider is that with an improving economy and a rising property market, it will only be a matter of time before interest rates start rising. With a lower $AUD the RBA will be more confident in starting to increase interest rates. And increasing interest rates will have a dampening effect on the housing market. You are looking to buy a property to live in - so how long do you intend to live in and hold the property? I would assume at least for the medium to long term. If this is your intention then why are you getting cold feet? What you should be concerned about is that you do not overstretch on your borrowings! Make sure you allow a buffer of 2% to 3% above current interest rates so that if rates do go up you can still afford the repayments. And if you get a fixed rate - then you should allow the buffer in case variable rates are higher when your fixed period is over. Regarding the doomsayers telling you that property prices are going to crash - well they were saying that in 2008, then again in 2010, then again in 2012. I don't know about you but I have seen no crash. Sure when interest rates have gone up property prices have levelled off and maybe gone down by 10% to 15% in some areas, but as soon as interest rates start falling again property prices start increasing again. It's all part of the property cycle.  I actually find it is a better time to buy when interest rates are higher and you can negotiate a better bargain and lower price. Then when interest rates start falling you benefit from lower repayments and increasing property prices. The only way there will be a property crash in Australia is if there was a dramatic economic downturn and unemployment rates rose to 10% or higher. But with good economic conditions, an increasing population and low supplies of newly build housing in Australia, I see no dramatic crashes in the foreseeable future. Yes we may get periods of weakness when interest rates increase, with falls up to 15% in some areas, but no crash of 40% plus. As I said above, these periods of weakness actually provide opportunities to buy properties at a bit of a discount. EDIT In your comments you say you intend to buy with a monthly mortgage repayment of $2500 in place of your current monthly rent of $1800. That means your loan amount would be somewhere around $550k to $600K. You also mention you would be taking on a 5 year fixed rate, and look to sell in about 2 years time if you can break even (I assume that is break even on the price you bought at). In 2 years you would have paid $16,800 more on your mortgage than you would have in rent. So here are the facts: A better strategy: "In a sentence, stocks are a share of equity in the company, while bonds are a share of credit to the company. When you buy one share of stock, you own a (typically infinitesimal) percentage of the company. You are usually entitled to a share of the profits of that company, and/or to participate in the business decisions of that company. A particular type of stock may or may not pay dividends, which is the primary way companies share profits with their stockholders (the other way is simply by increasing the company's share value by being successful and thus desirable to investors). A stock also may or may not allow you to vote on company business; you may hear about companies buying 20% or 30% ""interests"" in other companies; they own that percentage of the company, and their vote on company matters is given that same weight in the total voting pool. Typically, a company offers two levels of stocks: ""Common"" stock usually has voting rights attached, and may pay dividends. ""Preferred"" stock usually gives up the voting rights, but pays a higher dividend percentage (maybe double or triple that of common stock) and may have payment guarantees (if a promised dividend is missed in one quarter and then paid in the next, the preferred stockholders get their dividend for the past and present quarters before the common shareholders see a penny). Governments and non-profits are typically prohibited from selling their equity; if a government sold stock it would basically be taxing everyone and then paying back stockholders, while non-profit organizations have no profits to pay out as dividends. Bonds, on the other hand, are a slice of the company's debt load. Think of bonds as kind of like a corporate credit card. When a company needs a lot of cash, it will sell bonds. A single bond may be worth $10, $100, or $1000, depending on the investor market being targeted. This is the amount the company will pay the bondholder at the end of the term of the bond. These bonds are bought by investors on the open market for less than their face value, and the company uses the cash it raises for whatever purpose it wants, before paying off the bondholders at term's end (usually by paying each bond at face value using money from a new package of bonds, in effect ""rolling over"" the debt to the next cycle, similar to you carrying a balance on your credit card). The difference between the cost and payoff is the ""interest charge"" on this slice of the loan, and can be expressed as a percentage of the purchase price over the remaining term of the bond, as its ""yield"" or ""APY"". For example, a bond worth $100 that was sold on Jan 1 for $85 and is due to be paid on Dec 31 of the same year has an APY of (15/85*100) = 17.65%. Typically, yields for highly-rated companies are more like 4-6%; a bond that would yield 17% is very risky and indicates a very low bond rating, so-called ""junk status""." "If I don't need this money for decades, meaning I can ride out periodical market crashes, why would I invest in bonds instead of funds that track broad stock market indexes? You wouldn't.  But you can never be 100% sure that you really won't need the money for decades.  Also, even if you don't need it for decades, you can never be 100% certain that the market will not be way down at the time, decades in the future, when you do need the money.  The amount of your portfolio you allocate to bonds (relative to stocks) can be seen as a measure of your desire to guard against that uncertainty. I don't think it's accurate to say that ""the general consensus is that your portfolio should at least be 25% in bonds"".  For a young investor with high risk tolerance, many would recommend less than that.  For instance, this page from T. Rowe Price suggests no more than 10% bonds for those in their 20s or 30s. Basically you would put money into bonds rather than stocks to reduce the volatility of your portfolio.  If you care only about maximizing return and don't care about volatility, then you don't have to invest in bonds.  But you probably actually do care about volatility, even if you don't think you do.  You might not care enough to put 25% in bonds, but you might care enough to put 10% in bonds." In general, investors with a long period of time until they would need to withdraw the cash are best off holding mostly equities.  While the dividends that equities would return are less than the interest you would get in peer-to-peer lending, over long periods of time not only do you get the dividends from equity investment but the value of the stock will grow faster than  interest on loans. The higher returns from stocks, however, comes with more risk of big downturns.  Many people pull their investments out of stocks right after crashes which really hurts their long term returns.  So, in order to get the benefit of investing in stocks you need to be strong enough to continue to hold the stocks through the crash and into the recovery. As for which stocks to invest in, generally it is best to invest in low-fee index funds/etfs where you own a broad collection of stocks so that if (when) any one stock goes bust that your portfolio does not take much damage.  Try to own both international and domestic stocks to get good diversification.  The consensus recommends adding just a little bit of REITs and bonds to your investments, but for someone at 25 it might not be worth it yet. Warren Buffett had some good thoughts on index investing. In addition to what quid said, I think your risk tolerance should depend on how likely you are to need the funds in the near future. Say that you have $100k saved up and you want to decide how to invest it. Then you should ask yourself: The idea here is that if you invest say in stocks (high risk) then the value of your position could drop significantly and you'd potentially have to wait for a long time before it recovers. If you are forced to sell you could make a substantial loss. If you don't urgently need this cash, however, then you can feel relaxed and just wait for the market to reverse again. This is viewing risk through the lens of how likely it is that you'll have to wait a long time to get a substantial amount of your money back, which itself is a function of how likely it is for a substantial downturn to occur in a certain market. Your logic is not wrong.  But the risk is more significant than you seem to assume.  Essentially you are proposing taking a 2.6% loan to buy stocks. Is that a good strategy?  On average, probably.  But if your stocks crash you might have significant liabilities. In 1929, the Dow Jones dropped 89%.  In 1989, >30%.  In 2008-9, 54%.  This is a huge risk if this is money that you owe in taxes.  If you operate the same system year after year the chance of it going horribly wrong increases.