Great Reads
If you get to know me personally, you’ll learn that I love to read. I frequently share interesting reads and books with our team, and today, I’d like to do the same with this audience. Today, I want to share insights on financial strength vs. emotional strength in taking risks.
Our team at Whitaker-Myers Wealth Managers is constantly producing great quick reads that I have always found insightful. We typically have at least two new weekly articles covering industry news, financial strategies, and budget-friendly tips. All of these can be found on our blog page. But for today’s purpose, here are a few written by some of our team members that are great reads on this topic:
MEASURING YOUR RISK BEFORE INVESTING – Financial Advisor Nick Allen
RISK ASSETS - Financial Advisor Jake Buckwalter
HOW RISK TOLERANCE AFFECTS YOUR FUTURE – Certified Financial Planner® Professional Drew Hodgson
What I truly appreciate from our team is their wealth of knowledge and their ability to simplify complicated strategies and concepts for those who may be unfamiliar with these topics and industry language. This is no easy task, and it highlights the team's dedication to one of our core values of always having a heart of a teacher. If you’d like to schedule some time with any of our advisors or the specific advisors above, click on their respective hyperlinks to schedule. They can help you apply these concepts to your own financial situation. Now, on to today’s topic.
Risk Tolerance
Drew threw a touchdown in his article above (FYI – Drew was a quarterback for his college football team). I highly recommend reading it. Risk tolerance is an investor’s mentality when taking risks. What I mean by that is how comfortable the investor is with taking risks with all factors considered. This includes family, investment time horizon, future plans, understanding of the economy, geopolitical risks, asset class, location risks, systematic and unsystematic risks, and anything that could potentially impact the portfolio.
Wow, yes, that is a lot to consider, and unfortunately, that list is incomplete. I would argue that, other than the behavioral finance aspect of risk tolerance, the most important factor is the investor's phase of life.
“It's the phaaaaassssseee of life” (the highly awarded Circle of Life remake, releasing with Drew, Nick, and Jake as lead singers Q4 2024). Depending on where the investor is in the phase of life, their investing strategies and asset allocations to risky or riskless assets can vary. Early in our careers, most investors may be more willing to invest in risky assets to help grow their portfolio with a long-term horizon. This is commonly referred to as the wealth-building/growth phase. Compound interest and steady investing can be your best friend early on. On the other hand, the investor may decide to move into less risky assets towards retirement. During these years, the investor may try to preserve their portfolio. Thus, this is commonly referred to as the preservation phase.
Risk tolerance – the emotional ability to take risks.
Ability to Take Risk
Depending on the investor’s risk tolerance, they may decide to take some risks in their portfolio. The question, however, is, does the investor have the financial ability/flexibility to assume the risk? In my experience, investors are eager to build wealth early on and want to invest aggressively. Depending on their risk tolerance, this may be appropriate, but they may be on baby steps 1-3, and it may not be in their best interest to invest aggressively. Or even more importantly, they don’t have the money to invest aggressively. It may be in their best interest to pick a money market fund or treasury that will provide the security they need.
Each investor is different
The investor’s style, investment philosophy, risk tolerance, ability to take risk, knowledge, and many other factors come together to determine the right portfolio fit. Understanding the holistic picture and aligning the investor's strategic goals with their investments is the best service a financial advisor can provide. Our Whitaker-Myers Wealth Managers team ensures you have all the tools you need to succeed. Our group of teachers is always willing to have a deep-dive analytical discussion or can help break down the process and answer questions so you feel comfortable.
If you would like to talk to a financial advisor about your investments and future goals, let’s chat! Contact one of our advisors to schedule a meeting today.
Risk Ability vs. Risk Tolerance
August 5, 2024
Summit Puri
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