People tend to harbor this notion that investing is all about stock picking, industry monitoring, and company analysis. What is so often left out is the human emotion side, which is arguably the biggest determinant of success in the investment world. Your investing comfort level is the key to productively putting your money to work in the markets. You must find that sweet spot between risk and reward. If you can get there, you will be well on your way.
The risk side.
Everyone has a certain tolerance, or intolerance, of risk. A lot depends on your individual personality, age, and investing experience. The length of time before you need to utilize those invested funds is likewise a big factor. Are we talking a nest egg you intend to grow steadily over decades? Or will you need to live off the money sooner rather than later?
Investing can be an emotional rollercoaster if you do not know where you fall on the comfort level spectrum. Homing in on your risk tolerance can be a complex task. You may think you are completely okay with whatever your investments do on any given day. But, when the market sinks, you could quickly find out that is simply not the case.
A timely example? The stock market nosedive in early 2020. Many investors felt a knot in their stomachs as the markets went into freefall. Portfolios were turned topsy turvy. Savings disappeared. Nobody enjoys losing money when the markets go south, yet some fare far better than others emotionally. And rest assured – the stock market will tumble sometimes. While investing can be quite rewarding, it can also feel chaotic if you are too far out on your risk skis.
Being an investor is all about thinking far down the road. If what the market does (or does not do) on any given day gives you major heartburn, your portfolio may just be misaligned with your risk tolerance.
The reward side.
The reward of investing your money is the potential to grow your wealth. Time is on your side in accomplishing this goal. Always keep in mind the most effective investors have the long game, marathon mentality. They understand the stock market will fluctuate quite a bit over decades. The earlier you start investing, the better for it you will be.
Compounding interest is a massive reason why. Compounding interest is your money’s ability to grow more quickly over the years, like a rolling snowball. You earn interest on your investments, and in turn your interest will also start earning interest. The power of compounding interest increases as you steadily and diligently add to the pot.
Do not let your concern about taking on risk keep you on the investing sidelines. The day-to-day ups and downs of the stock market do not have a profound impact on your financial wellbeing over the long-term. What does is disciplined investing over your entire working life. If you avoid risk altogether, you will hinder your ability to grow your hard-earned money through the power of compound interest.
Removing the fear.
Neglecting your risk tolerance can damage your ability to prosper as a tenacious yet methodical investor. Emotions will take hold when the markets get complicated, leading to poor choices. Conversely, letting your fears of losing money inhibit your desire to invest can lead to detrimental results too. Finding the right balance between the two is easier said than done sometimes. That is where we come in.
At McKay Wealth, we believe being a knowledgeable investor takes a lot of fear out of the equation. Our goal is to empower professionals to take control of their finances. A well-diversified, risk adjusted portfolio allows you much greater leeway should the stock market go awry. We urge you to review your portfolio on a regular basis to find out whether your investments align with where you stand.
If you would like to do a risk check-in right now, take our 5-minute quiz to get started.