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How To Invest In Stocks With Zero Risk

Apr. 27, 2018 6:51 AM ET130 Comments
Laurence Kotlikoff profile picture
Laurence Kotlikoff


  • The goal for most investors is maintaining their living standard.
  • Yet these investors wish to invest in the market?
  • Can both objectives be satisfied?
  • The answer is yes. It's called "upside investing."

If you are like me and most members of the middle class, you are used to your living standard and would be loath to have it drop even 10 percent. But many of us invest much or most of our wealth in the stock market because we are lured by its average high yield. Is there a way to guarantee our living standard and still invest in the market? The answer is yes. It's called "upside investing."

Before describing how it works, let me explain why we are generally very adverse to experience a drop in our living standard, but would be delighted to see it rise, assuming the increase is permanent. The answer comes from one aspect of behavioral finance, called habit formation. Habit formation arises when people derive utility (happiness) not only from their current consumption but from its relationship to their past consumption. If it's higher they are happy. But if it's commensurately lower, they are, well, miserable. Hence, they try their best to avoid any living standard decline.

Is habit formation different from risk aversion? I'd describe it as a stronger form of risk aversion. Do we see habit formation in practice? I think we see it routinely when it comes to playing the casino. I recall a convention of economists in Las Vegas. It was the first and last time economists held their convention in Vegas. The casinos were expecting we'd drop a lot of money on the slots. But most of us just stood around observing what we viewed to be irrational behavior - gambling addicts placing less than fair bets. But some of us, myself included, gave gambling a try. But we did so by taking a small amount of cash (my amount was $50) and leaving our wallets at home.

Leaving our

This article was written by

Laurence Kotlikoff profile picture
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, Head of International Department for Fiscal Sustainability Studies, the Gaidar Institute, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (co-authored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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