If you’ve ever used any kind of ‘traditional’ financial advisor, you’ve probably been asked about skydiving. Not familiar with this experience? Here’s what it’s like. You are asked a series of questions about goals, income, and assets, and then, seemingly out of the blue (pun intended) comes a question about whether or not you’d go skydiving. Essentially, they assume that risky activities such as skydiving and risky investments go hand in hand. If you like one, you like the other. We’re going to show you how wrong this assumption is. Not only is it wrong, but it perpetuates a dangerous stereotype: that you should invest for the sake of investing. We really can’t stress how wrong this is.
MISCONCEPTIONS ABOUT RISK
Right now you may not fully understand what risk is and how it relates to your investments, and we think you deserve to really understand what risk means for your portfolio and your financial future. Don’t worry we’ll keep it snappy, but this one is super important because you might be undermining your #goals and that Y in H.E.N.R.Y.s™ is a temporary thing right? You’re not rich yet, but if your goal is to be soon, you have to make sure that your appetite for investment risk matches that.
We’re here to clear up a few misconceptions so that you don’t stand in your own way.
Most of us think of risk in a single dimension. I like risk, or I hate risk.
Lots of people say to us “I don’t want any risk,” which implies they shouldn’t invest at all. Just keep your money under a mattress, in a cookie jar, or in the safe at your local bank.
But then we explain to them that by not allowing their money to work harder and grow in the market they may not be able to retire, and 3% of the value of their saving is going to disappear each year to inflation. Yes, 3% of your money essentially will disappear to inflation if you don’t want to take any risk! Suddenly people are like, wait, no, I don’t want that either, maybe I do want some risk.
Instead of thinking of your money disappearing or whether or not you like extreme sports, we want you to think about risk in relation to your goals and timeline. Some investment advisors call this a ‘time horizon,’ what that really means is ‘when do you want to use the money you’re saving and investing?’ It’s that simple!
WHAT IS RISK TOLERANCE, REALLY?
Your risk tolerance is really about your goals and the timeline in which you’d like to accomplish them. The more time you have until you want to accomplish a goal, the more risk your portfolio should have. The less time you have until you’d like to accomplish a goal, the less risk you want to take on, if any!
Short term goals: keep it in the bank. It’s not a good idea to take any risk with money you need in the next two years, which is why we advise you keep short-term goal money in a savings account at an online bank, so at least it’s earning a little something. If the markets go down, two years is just not enough time for them to recover.
For long-term goals like retirement, kid’s college funds or a vacation home, you have plenty of time to ride out the ups and downs of the market. So in these instances, you can, and should, take on more risk.
UNDERSTANDING RISK TOLERANCE, WHAT IT FEELS LIKE
You want to retire, right? You probably have some vision of what that might be like, and whether it’s living it up on the beach with endless mojitos and not a meeting or care in sight, or becoming that eccentric museum-going septuagenarian who lives just off Central Park, you’re going to have to set some goals and take some risks to get there.
Even the most conservative 20-something should be pretty aggressive with their retirement portfolio, because you have the time to be. But here’s the thing, taking investment risks can feel super shitty. Watching your investments lose value sucks, and if you’re taking more risk you are going to see drops in value over time, it’s just part of the deal with investing. Markets go up, and markets come down, and you have to remember those retirement fantasies and not overreact in the meantime. Research shows that individual investors are really bad at setting aside their emotions. Emotions and investing really don’t mix, and all individual investors are bad at learning this lesson. So if you can’t set aside your emotions, it’s about setting up a strategy to help meet your goals while knowing your emotions might try to trip you up.
It’s all about giving yourself the best chance to meet your goals, and trying to set aside your feelings about the highs and lows in the meantime.
BUT WHAT IF I LIKE TO SKYDIVE?
That’s awesome! We can’t wait to hear your stories and should definitely follow you on Instagram. For the super risky out there, remember that your short term goals aren’t like your love of adrenaline, you need to stay realistic.
Risk isn’t a bad word, but risk should relate to time and goals. Your relationship to investment risk can’t be determined by a quick, five-question survey. That’s why at Stash Wealth we want to get to know you and help you understand what your relationship to risk should be to reach your goals, on your timeline.
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