If you knew you could pursue any dream or make any major change without risk, what would you do?
By Jimmy Miller
The fear of taking a risk and experiencing loss or failure tends to hold us back. We’re not saying to throw caution to the wind and do something crazy without evaluating potential consequences, but it’s important to recognize that human beings are naturally averse to loss. In our minds, the pain of losing is more powerful than the potential to achieve gains.1
How does this foray into psychology connect to your finances? Quite simply, one thing we are most afraid to lose is money. But here’s the irony: when we make emotional decisions and act irrationally in an attempt to avoid loss, we can lose even more. Just ask any investor who has sold stock when the market dropped and missed the recovery, only buying back in when the markets are high again.
What’s the solution? We know we need to invest to grow our money into a nest egg that will sustain us in the future, but how do we do this in a way that doesn’t strike fear into our hearts?
In fancy financial talk, risk tolerance is defined as a measure of one’s financial ability to withstand losses. While you can’t completely eliminate risk in your portfolio, you can absolutely ensure that the amount of risk you take correlates with the level of potential reward for you to gain. It is more than possible to match your investments to your goals while still being able to sleep at night during market downturns.
Unfortunately, it’s not as simple as telling your advisor you feel comfortable with “moderate” risk. In other words, everyone will have their own risk tolerance level, based on their age, life circumstances, and time horizon. The key is using a quantitative approach to pinpoint how much risk you are comfortable taking, how much risk you need to take to reach your goals, and how much risk you currently have in your portfolio.
Watch this video to see how it works!
Determining your personal risk tolerance involves analyzing your financial situation and balancing it with what you hope to achieve. Baobab Wealth Management can help you with that. We have an online tool, based on Nobel Prize-winning research, where you can find out your personal Risk Number. All in less than 2 minutes. Give it a spin right now!
Then, using your personal Risk Number as a foundation, we gather info, look at the facts, and build a portfolio that is right for you. It’s a way to give consistency and direction to your financial plan. Knowing your risk numbers helps us guide you toward a portfolio you can hold fast to when the road gets rough or when permanent loss stares you in the face. My goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. I’d love to chat with you, talk through your goals, and work toward your dreams while working within your personal risk level. Schedule a free introductory meeting online and take the first step to becoming a fearless investor.