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Understanding Risk Tolerance and Your Finances

01.25.2023 by Harry // Leave a Comment

How do you feel when you hear the word “risk” used about your finances?

Do you see a chance for excellent returns?

Are you able to picture the “adrenaline rush” of investing?

Do you ever worry that you won’t have anything left?

Do you consider the risk only a necessary step in the investment process?

An investor’s risk tolerance is the amount of risk they are prepared to take. But it might be challenging to determine your level of risk appetite. The risk may also offer opportunity, thrill, or the chance to make significant gains—a “you need to be in it to win it” mentality.

But how can a private investor assess their level of risk tolerance? What benefits may investors derive from grasping this idea regarding portfolio diversification?

Risk tolerance: What is it?

The amount of risk an investor is willing to take is called their risk tolerance. Nevertheless, figuring out your degree of risk tolerance may be difficult. A “you have to be in it to win it” approach may be associated with the risk and the opportunity, thrill, or potential for substantial rewards. 

But taking a risk means that you are willing to lose money, that you can handle market changes, and that you can’t predict the future.

In reality, behavioral experts assert that “loss aversion,” or that fear of losing something may influence decisions more than the expectation of profits, might affect how you see risk. As risk tolerance is based on how comfortable you are with uncertainty, and you might only know how willing you are to take risks once you face a possible loss.

Is it risk tolerance or risk capacity?

While sharing a name, your risk capacity and risk tolerance often operate independently.

Your unique financial condition determines your risk capacity, or the number of potential losses you can accept.

Contrary to risk tolerance, which may not alter throughout your life, risk capacity is more malleable and adapts to your financial and personal goals and the timeframe for reaching them.

Given your income requirements, you might be less likely to conveniently ride out a bear market if you have a mortgage, your own business, children close to graduating from college, or aging parents who depend on you financially. But, again, this contrasts with someone who is single and has no significant financial commitments.

A financial shock such as a job loss, an accident with high medical costs, or even a windfall may also impact your investing choices by changing the level of risk you can bear.

What are your financial goals?

Your investing goals must also be considered when determining how much risk may be accepted. For example, how much risk do you wish to take with the money you invest for your retirement or your children’s college tuition?

On the other hand, if you are utilizing natural risk capital or available cash to try to make more money, greater risk could be accepted.

Interestingly, some people are fine with trading higher-risk securities with their retirement assets. Make sure you understand what you are doing if you only use this to protect your transactions from tax exposure, such as when you trade futures in an IRA.

If you are an experienced futures trader, only use a small amount of your IRA money, and don’t depend on one deal to decide whether you can retire, this could be a good plan.

You might reconsider engaging in this much risk, though, if you are using your whole IRA to trade futures, have little to no net wealth, and are only seeking to minimize tax exposure for that deal you consider a “sure thing.”

Futures already enjoy a more favorable capital gains treatment than other types of income; the lesser of the two capital gains rates will be applied to 60% of your earnings in the future.

Given this, why would someone with a low net worth need to put their retirement funds at such risk? In other words, you should only sometimes do something simply because you can.

https://www.businessinsider.com/personal-finance/risk-tolerance-vs-risk-capacity

What is your investment experience?

Your degree of investment experience must also be considered when figuring out your risk tolerance. Are you a novice trader or investor? Do you already have some experience in this field but want to expand into something else, like selling options? Trading and investing are no different from other new endeavors because it is wise to start cautiously.

Before making a significant financial commitment, gain some experience. Always aim for the “protection of capital” and keep in mind the classic saying. Only if the worst-case outcome will allow you to survive to fight one more day does it make sense to take on the right amount of risk for your circumstances.

How do you make your risk tolerance into a financial plan?

Plenty of online questionnaires can give you a starting point for risk tolerance and how to turn that into an investment strategy. Since you want your suggested portfolio’s asset allocation mix to represent your risk tolerance most closely, being honest is undoubtedly the best action in this situation.

The next stage is to familiarize yourself with the standard performance information for your portfolio once you have determined where you lie on the risk spectrum. Again, the less likely you will respond emotionally when things are complex, the more you will know about what to anticipate.

Savvy investors take both risk and reward into account. Stocks and other investments with higher projected returns (and more volatility) tend to be riskier than more conservative portfolios made primarily of bonds and cash, which have lower volatility.

However, owing to constantly shifting market circumstances, even the most cautious portfolio might suffer short-term losses. This is why having a diverse portfolio with a wide range of investment possibilities is crucial.

Consider investing $10,000 in one of the three fictitious asset-allocation strategies shown below at the start of 1970. And through the end of 2016, you recalibrated your portfolio annually to ensure the appropriate mix of stocks, bonds, and cash was still present.

As a result, the riskiest portfolio would have increased to $892,028, the most intermediate portfolio to $676,126, and the most conservative investment to $389,519. 

Final thoughts

What is your risk tolerance? It seems like a simple question, but numerous factors must be considered. For example, your experience, age, net value, risk capital, and the specific investment or transaction being evaluated will all affect the response.

After giving this some thought, you can use this information to develop a well-rounded and diversified trading and investment program.

Image credit: [Wutzkoh]

Categories // Investing

The Best Financial Books of 2021

09.16.2021 by Harry //

There are thousands of books out there about how to become better with finances, how to invest, and how to be okay with talking about money.

Listed below are books that will teach you how to go from living tightly with money to retiring debt and being worry-free. There are many books out there for those wanting to learn about finances!

Retire Before Mom and Dad: The Simple Numbers Behind a Lifetime of Financial Freedom by Rob Berger

Retire Before Mom and Dad is a book that teaches you how to improve your financial future by using psychology, finance, and self-help concepts. This is a great book for those that are just beginning to get into the world of personal finance or those that want to learn more!

Rob Berger is a litigation attorney and the founder of popular personal finance and investing website.

Rob’s goal is to help people achieve financial freedom by helping them live a life free of financial stress and worry by teaching them about wealth and living financially free. 

In Retire Before Mom and Dad, Rob writes about the difference between a Roth 401K and a Traditional 401K, the ins and outs of investing, how to retire debt-free, and how to successfully and carefully analyze long-term decisions.

His simple approach and clear writing will teach you how to become financially wise and efficient, as well as how to invest and self-help. This is a great book for those just getting started in the financial world, or those wanting to learn more!

When She Makes More by Farnoosh Torabi

In When She Makes More, Farnoosh Torabi teaches the reader how to deal with income imbalances in relationships, and how to help women manage these circumstances that can have negative impacts. 

Today, there are more women than ever working as the household’s top earners. However, they face higher risks of burning out, depressions, infidelity, and even divorce. Farnoosh uses her real-life experiences to connect the reader on a personal level.

Sold as a physical book or an audiobook, Farnoosh Torabi outlines rules to help her readers learn how to address financial imbalances that can affect relationships negatively and how to become okay with talking about these problems.

In When She Makes More, readers will learn how to deal with changes in dating and marriage in society, how to know when to let your significant other lead, and how to allow your significant other to become a stay-at-home parent without making their life too easy. 

Broke Millennial: Stop Scraping By and Get Your Financial Life Together by Erin Lowry

Written for Millennials, Broke Millennial gives great insights on how to save money, handle student loan debt, negotiate a pay raise, and how to ‘adult’.

Erin gives humor and empathy a fun twist in Broke Millennials!

No one likes to think about money, especially when money is tight. In Broke Millennial, the reader will learn how to be okay with talking out loud about money and how to deal with it.

Described as refreshing and conversational, Erin relates to her audience in a way that will guide them to a path of financial wellness! 

Written for Millennials, Erin doesn’t use boring language to talk about investing and credit card debt, but rather uses analogies to relate those topics to Tinder, dating, and marriage.

Erin even talks about how to manage student loans and what to do when your dining out with friends and can’t afford to split the bill.

Written by a millennial for a millennial, this is a must-read!

How I Invest My Money by Joshua Brown and Brian Portnoy

In How I Invest My Money, you will learn about 25 experts and how they invest, spend, save, and give their own money.

Joshua Brown and Brian Portnoy will teach you there is no right or wrong way to use your money!

Joshua and Brian talked to 25 different financial experts, including financial advisors, portfolio managers, and venture capitalists, and have turned their stories into essays about their lives, families, struggles, and aspirations.

https://www.harriman-house.com/Howinvestmoney

How I Invest My Money describes how there is no right or wrong way to handle your money, but rather use these stories to teach the reader how to figure out what works best for them. 

You will read about different perspectives on bonds, stocks, funds, charity, and other means of achieving the life you have always dreamed of. How I Invest My Money will also teach your how to create and keep a healthy relationship with money and your values. 

Spend Well, Live Rich by Michelle Singletary

In Spend Well, Live Rich, Michelle Singletary teaches the reader how to support a family while living on a budget.

Michelle also teaches the reader that it’s okay to not feel bad about not spending. 

Michelle Singletary was raised by Big Mama, her grandmother who made $13,000 a year. Big Mama was the one who taught Michelle the “7 Money Mantras for a Richer Life.”

These mantras include “If it’s on your a$$, it’s not an asset,” “Sweat the small stuff,” Keep it simple,” and “Priorities lead to prosperity.” 

How to Analyze Your Financial Upbringing
Check out our article on analyzing your own financial upbringing.

In Spend Will, Live Rich, Michelle teaches the reader how to teach children the value of money, how to become comfortable talking about money in relationships, how to save money as a household, and how to look for and get the best loans for your situation. 

Summary

There are many resources to help you become comfortable with finances.

By becoming comfortable with your finances, you can have conversations about money in your relationships, learn how to save money as a household, and become okay with saying no. Start your journey to financial freedom today!

Categories // Earn Money, Education, Featured, Investing, Money Management, Reviews, Tips

Honest Review of Titan Invest | Pros and Cons

09.15.2021 by Harry //

With so many new investment options popping up, it comes as no surprise that you’re interested in learning more about auto investing services such as Titan Invest.

After reviewing the services they offer and researching their investment strategies, we’ve got the key details about Titan Invest that you’ll need to make an informed decision about investing with their company.

Titan Invest is an auto investing company, which means that you set parameters for the types of portfolios you’re interested in as investments.

Titan Invest Review: Pros, Cons, and What We Like

Then, the company makes the specific investment decisions for you. Typically, auto-investing companies have a much lower cost associated with an initial investment, and Titan Invest is no exception. 

You can begin investing with Titan Invest for as little as $100.

Are Titan Invest’s Services Legitimate?

The short answer is yes. Titan Invest does offer legitimate services. That said, however, their strategies and fee structure may not be for everyone. 

Because of the nature of the company’s services, many users do not understand how the investing process works.

What Are the Pros of Investing with Titan Invest?

There are many pros to using Titan Invest to help you choose your investment portfolio. Some of the best benefits that Titan Invest offers include but are not limited to the following:

  • Investors can choose the risk level where they are most comfortable—conservative, moderate, or aggressive
  • Choosing a portfolio type is simple with Titan Invest because they offer a simplified menu of just three portfolio profiles
  • Getting started is incredibly affordable at just $100
  • The company employees their own professional team of investment researchers that do in-depth research on all stock options before they are added to portfolios
  • Titan Invest’s fees are relatively low 
  • They offer an easy-to-use phone app for Android and Apple users
  • Once you set up your investment preferences, you don’t have to do anything else, and you can let Titan Invest complete all of the research and adjustments for you

What Are the Cons of Investing with Titan Invest?

Every auto investment company has its downside as well, no matter how many benefits they offer. Here are some of the most important cons of choosing Titan Invest-

  • While their fees are relatively low, their rates are higher than similar companies
  • Investors have no access to financial advisors
  • Titan Invest does not offer any assistance with tax strategies to increase your earnings
  • There is no customer support phone line
  • You are trusting people you’ve never met to handle your money for you

What Strategies Does Titan Invest Use to Make You Money?

Titan Invest uses three simple portfolio profiles to make things as easy as possible for new investors.

Titan Flagship

This is the default option for new investors signing on with Titan Invest. It is comprised of 20 stocks with large caps.

Titan Offshore

This is a new portfolio type just released in the spring of 2021. It is comprised of between 15-25 international companies stock for those interested in markets outside of the US.

Titan Opportunities

This final portfolio option is focused on growth over time, like the default option. Unlike the default, however, it is comprised of 20 stocks with low to mid-caps. 

These three portfolio profiles offer investors with little to no experience in the market the opportunity to get their feet wet.

So if you aren’t confident about making decisions about stock options just yet, but you are interested in dabbling in the market to see what it’s all about, Titan Invest is a reasonably good choice to start with. 

With their incredibly low minimum investment amount of just $100, you have little to lose if it turns out that this type of investment isn’t for you.

How Does Titan Invest Compare to Other Auto Investors?

There are several companies in close competition with Titan Invest that offer similar services.

Here, we’ll compare Titan Invest with two other auto-investing companies so that you can get a better idea of how Titan Invest stacks up against other options available to you.

Identifying a company that you feel like you can trust with your financial livelihood is one of the most important financial decisions you’ll ever make.

So, take your time and read through the details of how the following companies compare to one another before you take the dive and start investing in stock portfolios.

Fee Comparisons

Titan Invest’s two main competitors are Betterment and SoFi.

  • Betterment offers a set rate of 0.25%
  • SoFi offers a default account option with a 100% free-to-use robo-investor program

With a 1% rate for accounts with a $10,000 or more balance, Titan Invest comes in just behind Betterment in terms of rates.

Account Minimums Comparisons

Titan Invest offers a very reasonable, low investment minimum of $100. However, their two main competitors have them beat here as well.

Both SoFi and Betterment offer account minimums of $0, meaning you can begin investing with any amount you wish, from a dollar up. 

Why Should You Choose Titan Invest Over These Competitors?

While Titan Invest’s two main competitors do have an edge in the categories listed above, the benefits that Betterment and SoFi offer essentially stop there.

Both Betterment and SoFi have reputations for lousy service with their free minimum account options. Their services primarily focus on their paid-for investment opportunities, which have minimums of $100,000.

So, now that you know a little more about these popular auto investing companies, you can easily see that the services offered are very similar.

The details of how your money is handled and the fee structure are all reasonable but tailored to attract clients with different preferences.

Image credit:[KAROLINA GRABOWSKA]

Categories // Investing, Reviews

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