What is the definition of risk? As a noun, it means “the state of not being protected from injury, harm, or evil.” As a verb (action) it is “to take a chance on.” In the case of investing, it’s anything that causes a market pullback that you didn’t plan on.

Risk and reward are two sides of the same coin; and in today’s 0% rate environment, you can’t have one without the other. We’ve learned assessing and assigning the correct risk/reward mindset for an investor is instrumental to their financial success. Earning long-term returns requires enduring short-term risks.

For decades, investment websites, 401(k) enrollment forms, and advisors have all helped investors determine their risk tolerance by taking 3 main things into consideration:

1) How many years you have to invest

2) How much you already have saved

3) How much you can save every year

This calculation would work beautifully IF we were not humans. If who you’re investing for is yourself:  what, where, and why are still missing from the equation.

As humans, our behavior is influenced heavily by emotions and our history with money. We have seen investors of all backgrounds make big investment decisions that go against their own long-term financial plans and goals. Fearmongering and FOMO (fear of missing out) are common emotional culprits.

To be a successful investor (setting and meeting your own goals) you must set realistic goals built around a portfolio and plan you can stick to. Easier said than done.

Choosing an investment strategy is not as easy as checking a box for conservative, growth, or aggressive growth. Each of these terms is defined individually. The risk-reward quotient that we recommend has multiple inputs:

1)      Current age of the investor

2)      What you’re saving/investing towards and why

3)      Investment experience (recovering emotional investor, family history with money etc.)

4)      Current financial situation (Net worth, savings rate, debt/income, experience with money)

5)      How much you can commit to saving/investing regularly

To make sure your risk/reward quotient is properly aligned, feel free to schedule an appointment with us today, at (530) 487-1777.