By Dominique’ Reese
Investing is not just for the rich and wealthy. It’s for you too. It may not feel that way, but believe me it is. Normally, clients share that they don’t know much about investing and want to learn more. Further, they want to make the most of their savings, or want to grow their savings beyond what they have been able to do and that’s where I come in to build strategies to help them do just that.
One strategy we employ are investment strategies. However, every client doesn’t come to me embracing investing. For many, investing can be scary, overwhelming and simply, risky business and that’s true. Investing can be all those things, but with a basic understanding under your belt, you can conquer investing and experience financial breakthroughs that you may need to solidify your wealth foundation.
So, what does this basic understanding entail you might ask?!?! While the basics of investing surely include learning about stocks and bonds, mutual funds, the stock market and buying low and selling high, I want to share with you, that which you don’t hear as much about, but is equally important and valuable: risk tolerance, time horizon and investment goals. Do you know your risk tolerance? Time horizon? Have you set financial and/or investing goals? This week’s article will focus on risk tolerance. We will tackle the other two in future articles coming soon.
I must say now, the content in this article is not financial advice or investment advice. You should consult your investment advisor for implementation and what is best for your personal financial situation.
Once you understand what a stock is, a bond, a mutual fund, you will want to start adding these investments to your portfolio. To do that, you must first understand your risk tolerance. I like to define risk by asking clients, “how much are you willing to lose?” Heard of the saying, “can’t win for losing?” Well, that is what investing can be about, taking a certain amount of loss in order to gain.
Some of you may not be comfortable with risk at all. You may say, “I am not willing to lose anything, I can’t afford to lose!” However, if you really think about it, you’re already taking some loss right now. Opportunity costs are everywhere, especially when we make financial decisions.
The fact that you are not investing or maximizing your savings or saving as much as you can save, is a loss in itself. You’re already taking on a certain amount of risk. You may not think so or haven’t considered it, but most people who say they are afraid of investing because they don’t want to lose any money, are usually losing money anyway, without investing. So, unfortunately, they’re already taking on risk, without the rewards that could come from investing. Is this you? What risks are you taking in your financial life? In what ways are you incurring loss without the commensurate reward?
Knowing your risk tolerance, or how much you are willing to lose, can help you identify the best investment vehicles for your portfolio. There are many ways to invest but every option is not suitable for every investor. So we use one’s risk tolerance as one way to help determine the best investment vehicles that should be used.
Generally, stocks are riskier compared to bonds and bonds are safest compared to stocks. There is some gray area in between, where you can find vehicles like mutual funds, exchange-traded funds, index funds, spiders and more. However, generally speaking, this classification is common.
If you like taking risk, you are said to be risk-loving. You’d appreciate having stocks and other riskier vehicles in your portfolio. If you do not like taking risks, you are said to be risk averse. You may appreciate investing in bonds and cash and other safer vehicle options. And lastly, if you are indifferent to risk taking, you are said to be risk neutral. You may appreciate having a little bit of stock, with some bonds, some mutual funds, some cash, and more. While defining your risk can get much more detailed than these classifications, and it should once you begin to work with your professional, they offer a high-level way to identify just where you fall within the risk spectrum. What is your relationship to risk? But, remember, to grow your savings via investing, you have to take risk and employ a combination of these vehicles in your portfolio.
When you understand that you are already taking great risks with your money, but you may not realize it, you are more willing to accept investing as a way to make money, rather than only suffer loss. Investing involves risk and the saying goes, “high risk, high reward.” However, there is a place in investing for everyone, as we described earlier. No matter your personal financial situation, you can benefit from investing. You must first define your risk tolerance and understand just how much loss you are willing and able to take. Once you have done this, you can move on to defining your time horizon and setting your goals.
The more you learn about investing the more you will embrace it and see that it is actually less scary than it seems at first. You can join a safe learning community, where learning more about your money is what we do to grow our money. Learn more by emailing me at firstname.lastname@example.org.
If you are going to take the risk anyway, position yourself to reap the rewards that could come from that risk. Embrace investing, but don’t go it alone. Join me and other like-minded money masters, who want to take their savings to the next level.