In most cases, no matter what the age or gender when we ask an individual, “On a scale of 1-10 what would you say your risk tolerance is?” most people are like a deer in headlights. They really don’t know. Some naturally would say very low like a 2 or 3, some more daring would say a 5 because there is comfort in the middle. This important information is not taught in school, nor do most go out of their way on a Saturday evening to study quantitative risk and how it applies to you.
Alexander Joyce, President & CEO of ReJoyce Financial, shares ways to begin thinking about investing your money.
If you are investing in the market, you must be comfortable with some volatility, meaning the market fluctuates in value up and down. Yes, when its down, you can lose money. This is when you think, “I don’t want to lose money,” which is a key component of considering risk tolerance. If you are able to ride out some volatility, ask yourself “If the market goes down, how much of your hard-earned money are you willing to lose?” Some would say a little, stay the course, or none.
For those that say none, you would be more conservative, of course, but please note: there is such thing as going broke safely. If inflation is 2% and your money is in a bank earning .25%, if you’re lucky, this means you are losing 1.75% every year! The goal, even if you are conservative, is to, at least, keep up with inflation, as well as the risk-free rate of return.
For those that want more growth and can handle the ups and downs, we must take into account age and ability to continue to earn income. This allows for more time to recover from a long downturn, if any. A good rule for this is the rule of 100: write 100 on a piece of paper and subtract your age; statistically, that is the amount you should have in the market. Again, this is not a proven strategy but a starting point to consider when thinking of risk tolerance.
Most of all, seek advice from a professional. Much like if you had a plumbing issue and you’re not a plumber, or if your air conditioning goes out, and its 100 degrees outside. All of these things are major components of your life, as is your hard-earned money. This is nothing to play with, and it must be taken seriously. It must be done correctly the first time.
For more information and financial advice, go to www.ReJoyceFinancial.com.