People are different in their risk tolerance. Financial advisors will advise investors to arrange investment portfolios and assess risk tolerance based on their age. The younger you are, the more tolerant you can be, and the older the more conservative one’s investments should be. I agree with this advice, but there is more to it than this simple one-size-fits-all strategy for building, growing, and maintaining wealth. People have different personalities and past experiences that cause them to be more risk comfortable or not. It’s not just about fear, stress, or anxiety. It’s also about the quality of your life during investing. Read more and take some time to look inward and figure out what your risk tolerance is.
It’s been a rough few years, the housing market has been up to record highs, stocks record lows, and then highs all within a few years. Life has changed a lot since 2020, and it has surprised most of us since then. Knowing who we are regarding risk will help us make educated decisions based on more than just what the odds are. We need to know how much risk we can tolerate. Be a better investor and learn to invest the smart way by personalizing your investing strategy to what works for you.
Quality of life is essential. We get jobs or start businesses that put us into financial positions where we can be comfortable. I think comfort is the name of the game for most people. When that comfort is interrupted by anxieties, we can lose clarity and divert into fight or flight. This is where the differences start; risk-averse people will seek flight, while risk-friendly personalities will fight. There is no better than the other, just different. If I know I’m risk-friendly, I would be careful not to gamble or arrange my investments in a way that can be too careless as I might not be aware I’ve taken too much risk. I think people who are sensitive to gambling should have some extra support from a friend or family member who knows them well and invests responsibly. If I’m risk averse, I might have debilitating anxiety if I don’t have a backup plan and enough money in the bank to support myself and my family.
Know Thy Self
Consider how being risk-averse or risk-friendly has affected your life. After considering it, think about how much more you can handle where you are, and then think of what you can handle moving toward the next steps of your goals. For example, if you have started investing in real estate and it’s going very well, how will you know when it’s time to get that next property? Is everything going smoothly with the first property? Rentals are working out well, repairs are done, it’s now self-sufficient, and it doesn’t take much time to manage. Maybe if the right deal comes along, it’s time to take on the second property, but make sure to contemplate the following:
How much time do you need to invest in getting it self-sufficient?
How soon can it be rented?
How much money will need to be allocated to get the new investment in order?
Where will that money come from?
I read a story of a successful restauranteur who continued to open restaurants as they were doing well. The second, then the third, then the fourth restaurant were all opened in a few years. As time passed, their first restaurant started having challenges that weren’t attended to, and then the second, third, and fourth restaurants had similar challenges. Within a year, all their restaurants were failing, and the owner used his family home to get the cash to cover the gap in the restaurant’s cash flow. Not long after, they were forced to close and, in the process, lost their family home to debt repayments. The moral of the story is not to underestimate the challenges; make sure to keep going back to the first, second, and third investment while developing the second, third, and fourth, and so on.
When I was in sales training, we had a practice of training a new hire comprehensively for two weeks, then letting our new hires out on their own for two weeks. We would bring them back in for another few days of training a few times a month. Please don’t leave any investment, trainee, or business alone to fend for themselves. Keep going back. Passive income is a fantastic idea, but it’s typically impossible. We must be involved to some extent. Risk what you know you can handle while continuing to invest, and make sure not to extend yourself over what you can handle.
Risk and Anxiety
Risk is associated with anxiety, and anxiety is associated with energy; energy lost due to anxiety will reduce energy in necessary areas of your life. If you are anxious, your energy is reduced, which can cause immunity problems and sickness. You need to plan and know what you can expect before getting into any investment. What can you handle, how hard, how bad, how messed up can it get? Can you handle that?
In 2023, the stock market is all up in the air. Some people say we are headed for doom, while others say this is the best time in history to see large earnings. Consider your five, or ten-year plan. How much money do you need access to, and what are you willing to lose for the right potential win. The key to figuring out your risk tolerance is asking yourself questions. Knowing who you are and what you’re willing to risk is going to make the day-to-day challenges of investing easier to tolerate.
Learn Your Risk Tolerance
Vanguard has an online questionnaire that will help you determine your risk tolerance. Charles Schwab has a downloadable guide to help keep you on track with your investment goals while also prioritizing goal setting and risk tolerance. It’s important to take a couple of different approaches to these questionnaires; a questionnaire related to an investment portfolio will include questions about how much you have saved and how much money you need access to in the next five or ten years. A risk assessment that consists of a personality questionnaire like the one from the University of Missouri will help you figure out who you are and what you can expect of yourself.
Accountability Partners
I think it’s important to have a group, or at least a couple of people you can invest alongside, not together as a partnership, but with different personalities who can hold each other accountable to goals and plans and make sure you don’t go too far away from who you are. Some people call them a mastermind group or accountability partners. Whatever you want to call them, they will be people at or above your level, people you look up to and trust. Include a financial advisor with good ethics and a successful background; you have the keys to successful investing. Finding the right people will take some time, but put that intention out there, meet some people for coffee, and talk about investing.
It’s a challenging time for investing right now, which makes knowing who you are, supporting your goals, and having the right team of investors around you vital for success. It’s more important than ever to understand what your risk tolerance is. Do your research, be patient with yourself, and have fun with the process because sometimes that’s the best part. Subscribe for more investing posts. Have a lovely day.
