The 7 new rules of financial security

Rule No. 1: Risk

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• How to play by the new money rules

Old thinking: If you can stomach the ups and downs that come with risk, you'll be rewarded.
New rule: Risk isn't about your stomach. It's about making or missing an important goal.

You know you have to consider risk. But what is risk? Many of us have learned to think of risk as synonymous with volatility. For years, what came down reliably bounced back even higher. You could easily conclude that risk tolerance was just a matter of taste. As long as you had the fortitude to see the occasional loss on your 401(k) statement and not panic, you would capture superior returns over time.

As you now know, the "over time" part of that last sentence is the real risk of relying too heavily on stocks. The longest period of negative returns for U.S. equities is 16 years, according to data collected by Wharton economist Jeremy Siegel. And we're at over a decade as of late February.

If you hit a slump in returns at the moment you need the cash, the eventual upside of volatility won't do you much good. Consider the analysis above from T. Rowe Price, which shows the impact of a weak market in the first five years after you retire. Because you have to sell falling assets to live on in the early years, your portfolio may be so small by the time the rebound comes that you still run out of money.

What to do: You shouldn't run from risky investments just because they lost money - that train has left the station. But the old buy-on-the-dips advice isn't quite right either. This bear market's lesson is that how much risk you can take is a matter of how much you can lose and still meet your basic goals. That may mean scaling back on stocks, even if you miss some of the next market rebound.

By Carolyn Bigda and Paul J. Lim, Money Magazine

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AIG's Liddy: 'I share that anger'

AIG chief Edward Liddy tells lawmakers that bonuses were hard to swallow, but needed.
WASHINGTON (CNNMoney.com) -- Edward Liddy, chief executive of bailed out insurer American International Group, will tell Congress Wednesday that he found the company's controversial bonuses "distasteful," but necessary because of legal obligations and competition, according to a written copy of his testimony.

"We have to continue managing our business as a business -- taking account of the cold realities of competition," Liddy will tell the House Financial Services subcommittee. The hearing is set to begin at 10 a.m.

"Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful," he added.

0:00 /2:05AIG's bonus conundrum

The committee is set to hear testimony from Liddy and a number of government officials and insurance experts. Liddy, who took his job in September after the government stepped in, is expected to face tough questions about the company's controversial bonuses and bailout.

It has been a bumpy ride of late for the troubled insurer. The company received yet another bailout on March 2 totaling $170 billion -- the fourth bailout in less than six months.

On March 4, Congress began a week-and-a-half-long battle to obtain the names of counterparties that benefited from AIG's bailout.

The biggest controversy surrounds bonuses going to the company's senior employees. Public furor erupted over the $165 million in bonuses -- 73 of which topped $1 million.

"We are meeting today at a high point of public anger," Liddy is prepared to say. "I share that anger."

The bonus controversy prompted the Obama administration and Congress to try to recoup the money and New York Attorney General Andrew Cuomo to subpoena the firm for recipients' names.

On Tuesday, Treasury Secretary Tim Geithner said in a letter to Congress that the government would force on AIG a "contractual" duty to pay the government an amount equal to the total of the bonuses.

Still, House Financial Services Committee Chairman Barney Frank, D-Mass., said on CNN's "American Morning" Wednesday that Congress will pressure Liddy to rescind the bonuses.

"We are going to ask him [Liddy] to be fully cooperative in our effort, but I think the federal government has to take the lead on these lawsuits," he said. "I believe we are saying as the owners of the company, we do not think we should be paying bonuses or should have paid bonuses to people who made mistakes who were incompetent."

The committee also plans on hearing testimony from Scott Polakoff, Acting Director of the Office of Thrift Supervision; Orice Williams of the Government Accountability Office; Joel Ario of the National Association of Insurance Commissioners; and Rodney Clark, managing director of Insurance Ratings at Standard & Poor's.

A rocky six months

AIG's troubles stem from its financial products unit, which sold credit default swaps -- essentially insurance contracts -- on collateralized debt obligations, or CDOs. The value of the CDOs plummeted in 2008, and AIG was forced to post more collateral to back up the swaps.

The company also took sizeable writedowns on its subprime mortgage-backed securities holdings, which fell in value as the housing crisis wore on.

AIG (AIG, Fortune 500) suffered a huge loss in the months leading up to its Sept. 16 bailout, and shares of the company tanked, limiting its ability to raise cash. Credit raters then downgraded AIG, requiring it to post more collateral.

Government officials decided they had to act lest the insurance titan file bankruptcy. At the time, AIG had $1.1 trillion in assets and 74 million clients in 130 countries, so the company's collapse would likely roil the global markets.

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