2847: [Part 2] Why Is Taking Financial Risk Important? by Vicki Cook and Amy Blacklock of Women Who Money

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[00:01:06] [SPEAKER_00]: This is Optimal Finance Daily.

[00:01:08] [SPEAKER_00]: Why is Taking Financial Risk Important?

[00:01:11] [SPEAKER_00]: Part 2 by Vicki Cook and Amy Blacklock of WomenWhoMoney.com.

[00:01:17] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diania Merriam.

[00:01:21] [SPEAKER_00]: Welcome back to Optimal Finance Daily, where I read to you every day of the week with permission from the authors.

[00:01:28] [SPEAKER_00]: Today is actually a continuation from yesterday.

[00:01:32] [SPEAKER_00]: So if you haven't done so already, I'd recommend listening to that episode first.

[00:01:37] [SPEAKER_00]: But if you're all caught up, then let's get right back into it and hear Part 2 as we continue optimizing your life.

[00:01:48] [SPEAKER_00]: Why is Taking Financial Risk Important?

[00:01:52] [SPEAKER_00]: Part 2 by Vicki Cook and Amy Blacklock of WomenWhoMoney.com.

[00:01:58] [SPEAKER_00]: Number 2, Educate Yourself About Investing.

[00:02:02] [SPEAKER_00]: It's amazing how much information is at your fingertips when it comes to learning about investing.

[00:02:08] [SPEAKER_00]: Yet the volume of information you can find online is also overwhelming to many new investors.

[00:02:14] [SPEAKER_00]: Where do you start?

[00:02:16] [SPEAKER_00]: What should you read?

[00:02:18] [SPEAKER_00]: Who can you believe?

[00:02:20] [SPEAKER_00]: These are all great questions.

[00:02:22] [SPEAKER_00]: Our most important advice?

[00:02:24] [SPEAKER_00]: Avoid getting your financial information from only one source.

[00:02:28] [SPEAKER_00]: New investors can begin by learning some basic investing terminology and other investing concepts.

[00:02:34] [SPEAKER_00]: Following is a list of some of the main categories of savings and investment products.

[00:02:40] [SPEAKER_00]: Each has its own general level of risk and return.

[00:02:44] [SPEAKER_00]: Within each category, specific products may carry more risk or provide more gain than others.

[00:02:51] [SPEAKER_00]: There are also many alternative investments such as real estate, precious metals, artwork,

[00:02:57] [SPEAKER_00]: cryptocurrency, etc.

[00:02:59] [SPEAKER_00]: You might consider when deciding where to invest your money.

[00:03:03] [SPEAKER_00]: Some investments will be passive while others like real estate investing may be more hands-on.

[00:03:10] [SPEAKER_00]: Educate yourself in anything of interest and never invest your hard-earned cash in something you don't understand.

[00:03:17] [SPEAKER_00]: Number 3, Keep Learning.

[00:03:20] [SPEAKER_00]: Once you get more comfortable, continue reading articles, blog posts, and investing books to increase your knowledge.

[00:03:28] [SPEAKER_00]: Debbie Sandsons, the $1,000 investor, is a great place to start even if you only have a few hundred dollars to invest.

[00:03:36] [SPEAKER_00]: Anxiety over investing can be eased with Julie Grandstaff's book, Save Yourself,

[00:03:42] [SPEAKER_00]: your guide to saving for retirement and building financial security.

[00:03:47] [SPEAKER_00]: And if it all seems too complicated, J.L. Collins shares strategies you can follow in the simple path to wealth.

[00:03:55] [SPEAKER_00]: If you plan to work with a financial professional, make sure you understand how they make money.

[00:04:00] [SPEAKER_00]: Consider working with someone who has a fee-only structure for unbiased advice.

[00:04:06] [SPEAKER_00]: If you hire a financial coach, be sure to choose someone you're comfortable with

[00:04:11] [SPEAKER_00]: and who has a track record of successful work with new investors.

[00:04:15] [SPEAKER_00]: Also check references and consider their background knowledge and experiences.

[00:04:21] [SPEAKER_00]: Number 4, Determine Your Financial Risk Tolerance.

[00:04:25] [SPEAKER_00]: You've probably heard that the younger you are, the more risk you should take when it comes to investing.

[00:04:31] [SPEAKER_00]: When you have a lifetime ahead of you to earn more money and deal with economic downturns,

[00:04:36] [SPEAKER_00]: you can afford to pursue higher returns. But you also need to remember that personal finance is personal.

[00:04:43] [SPEAKER_00]: Your money's story and emotions will impact the decisions you make now and in the future,

[00:04:49] [SPEAKER_00]: and it takes time to build your investment philosophy.

[00:04:53] [SPEAKER_00]: Financial professionals or coaches and even robo-advisors have tools or calculators

[00:04:59] [SPEAKER_00]: to help you determine your level of risk tolerance.

[00:05:02] [SPEAKER_00]: You might be surprised to find out you aren't as conservative as you think,

[00:05:06] [SPEAKER_00]: or the exact opposite. There are also tools online such as the University of Missouri's

[00:05:13] [SPEAKER_00]: Personal Finance Planning Investment Risk Tolerance Assessment.

[00:05:17] [SPEAKER_00]: Vanguard and most other investment websites offer free online questionnaires too.

[00:05:23] [SPEAKER_00]: After you answer the assessment questions, you'll get targeted feedback about your level

[00:05:28] [SPEAKER_00]: of risk tolerance. Again, use more than one tool and compare your findings to determine

[00:05:34] [SPEAKER_00]: the best accurate result.

[00:05:36] [SPEAKER_00]: And number five, take action and revisit risk.

[00:05:41] [SPEAKER_00]: Once you've taken a deep dive into your financial situation and future financial goals,

[00:05:48] [SPEAKER_00]: learned more about investing or worked with someone on developing an investing plan

[00:05:53] [SPEAKER_00]: and figured out your risk tolerance, it's time to decide what to do about your investments

[00:05:59] [SPEAKER_00]: and take action. Whether you decide to start investing, change asset allocation,

[00:06:05] [SPEAKER_00]: or take more risk for a higher potential return, or stick with your current strategies for now,

[00:06:11] [SPEAKER_00]: you're making progress towards building wealth for your future.

[00:06:15] [SPEAKER_00]: You'll likely have more financial security by managing some level of risk,

[00:06:20] [SPEAKER_00]: but only you can decide how much risk you'll take for potentially greater rewards.

[00:06:26] [SPEAKER_00]: Once you determine a strategy, you'll mostly want to set it and forget it,

[00:06:30] [SPEAKER_00]: but this doesn't mean ignoring it. You don't want to become so comfortable with your investment

[00:06:35] [SPEAKER_00]: decisions that you fail to reconsider what risk means to you over time.

[00:06:41] [SPEAKER_00]: Diversification of your portfolio is key. Your risk tolerance may change as you age

[00:06:47] [SPEAKER_00]: or deal with certain life situations and get closer to or eventually retire.

[00:06:53] [SPEAKER_00]: Managing risk to build wealth

[00:06:56] [SPEAKER_00]: When you decide it's time to take on more risk, you don't have to rush to change your

[00:07:00] [SPEAKER_00]: total investment strategy. Time is a crucial factor in the magic of compounding,

[00:07:06] [SPEAKER_00]: but making investment decisions before you're ready and understand them can backfire too.

[00:07:12] [SPEAKER_00]: Some people embrace risk by leaving all or most of their safe investments behind.

[00:07:18] [SPEAKER_00]: Others will sacrifice higher potential returns for more security.

[00:07:22] [SPEAKER_00]: If a conservative approach helps you sleep better at night,

[00:07:25] [SPEAKER_00]: investing more money for a lengthier period will build wealth too.

[00:07:29] [SPEAKER_00]: The important thing is that you'll be making decisions about how to invest for your future,

[00:07:34] [SPEAKER_00]: rather than being afraid to take action. By assessing your financial health,

[00:07:39] [SPEAKER_00]: you'll know exactly where you stand with money. You won't take on a risk just because

[00:07:43] [SPEAKER_00]: someone tells you it's important. You'll opt or not for investments with higher risk

[00:07:48] [SPEAKER_00]: and greater potential returns because that's part of your financial mission and investing plan.

[00:07:54] [SPEAKER_00]: Your mindset will shift over time from being fearful to courageously taking more risks.

[00:08:01] [SPEAKER_00]: You'll be confident to ask questions and you won't panic in market declines.

[00:08:06] [SPEAKER_00]: You'll have what it takes to be a successful investor.

[00:08:13] [SPEAKER_00]: You just listened to part two of the post titled,

[00:08:16] [SPEAKER_00]: Why is taking financial risk important? by Vicki Cook and Amy Blacklock of womenwhomoney.com

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[00:09:28] [SPEAKER_00]: I think the topic of risk tolerance can be looked at in a couple of different ways.

[00:09:33] [SPEAKER_00]: The first is from an emotional perspective. If you see your investment portfolio go down,

[00:09:39] [SPEAKER_00]: will that cause you to panic sell? And the second is from a more practical perspective.

[00:09:45] [SPEAKER_00]: What is your time horizon for investing and are you focused more on accumulation or

[00:09:50] [SPEAKER_00]: preservation based on when you will use this money? I'm not sure it makes much sense to

[00:09:57] [SPEAKER_00]: determine your risk tolerance from the emotional perspective. A more conservative asset allocation

[00:10:03] [SPEAKER_00]: might alleviate some fears, but I think it would be much more efficient to address those fears with

[00:10:10] [SPEAKER_00]: more education. If you're invested in low-fee total market index funds over long periods of time

[00:10:18] [SPEAKER_00]: and you understand the cyclical nature of the stock market as well as the fact that

[00:10:24] [SPEAKER_00]: market corrections reflect paper losses versus realized losses, you will know that you have

[00:10:30] [SPEAKER_00]: nothing to fear. I highly recommend you read the book Why Does the Stock Market Go Up? by

[00:10:36] [SPEAKER_00]: Brian Furr-Oldi to help in this regard. When you are able to mostly ignore the short term

[00:10:42] [SPEAKER_00]: fluctuations of the stock market, you're confidence in investing skyrockets. And if

[00:10:49] [SPEAKER_00]: you have a shorter time horizon because you're approaching retirement and will start drawing

[00:10:53] [SPEAKER_00]: down on your portfolio, so you don't have as much time to recover from corrections,

[00:10:58] [SPEAKER_00]: that's a great reason to move towards a more conservative asset allocation.

[00:11:04] [SPEAKER_00]: But the reason is based on practical need, not an emotional misunderstanding of how

[00:11:09] [SPEAKER_00]: investing works. But that's going to do it for today. Thanks so much for being here and

[00:11:14] [SPEAKER_00]: listening every day. And I'll see you again tomorrow for more Optimal Finance Daily,

[00:11:19] [SPEAKER_00]: where your optimal life awaits.