Welcome back! My 4th of July weekend was jam packed with family, golf, cocktails, and fireworks – hopefully yours was as well. Part three of our four-part-series on how millennials should be saving and investing comes at an ideal time – the first weekday back from an inevitably expensive weekend.
In part two of this series, we talked about giving your money a purpose. Hopefully you’ve already begun to do this. What are our goals? Why are these goals important to us in the first place? How much money do we need to hit our targets, and how much time do we have to get there? Answering these questions is half the work.
With purpose and timeframe in mind, we now set our sights on how much risk we are willing to take with our investments. This is a dynamic process – an intrinsic evaluation of your behavioral tendencies, and above all else, your values.
Your Relationship With Risk
Do you look like this every time something goes wrong?
Or are you “CCC” (cool, calm, and collected)? Do you hate surprises, or live for thrill? Do you insist on checking your account balances daily, or haven’t you checked them in months? Does the thought of uncertainty make you anxious, or does the potential upside of uncertainty excite you?
The way you answer these questions will shed light on your level of adversity to risk. Let’s look at an example.
Would you be willing to wager your ability to pay for a child’s college tuition if the upside could provide the means to pay for college, a second home, and an early retirement? The optimist gravitates to the upside potential, whereas the pessimist focus remains on the potential loss.
Which one are you?
In addition, recognize that risk is evaluated not only based on the individual and their values, but also the timeframe associated with a specific goal.
Times Relationship With Risk
As an investor, time is your best friend. Your ability to ride the waves will make or break you. After all, the stock market is not exactly consistent, right? Look at what the S&P 500 Index has done since 1990.
Remarkably similar to a wave, right? There are bad days, months, and even years in the market. If you invest in the stock market, you will inevitably be losing at some point. You just will. But losing is a relative term.
Let’s say you buy a 100 shares of Apple stock at $144 per share. After one year, Apple stock is trading at $120. Shit – you’ve lost $2,400! But, have you actually lost that money? Think about it, what is the only way to lose money on anything you own – cars, houses, electronics, stocks, etc.? Selling something for less than you paid for it.
So, until you sell the shares of Apple, you haven’t actually made or lost anything.
In a round-about way, this is how we determine our investment strategy. If our goal is buying a house in one year, we aren’t going to jeopardize that money in a risky stock play. Things could work out great, sure, but if they don’t you won’t be a happy camper. This is a bad look – it’s unnecessary risk.
However, if our goal is college tuition for our kiddo in 15 years, we have more time to ride the wave, and therefore it makes sense to take on a little more risk. Furthermore, if the goal is retirement in 40 years, get your daredevil pants on, because we are likely diving head first into a pool of risk folks.
Again, we can endure a short-term loss in value if we have time to make up for it.
So, what’s the take away here? If you’ve been following this series, you’ve begun to give your money a purpose. You have your goals laid out, and you know exactly why each one is important to you. You have an idea of how much dinero it’s going to take to hit your targets, and you have a timeframe associated with each of them. Now that we have begun to think about the concept of taking risk, we are narrowing in on the proper investment strategy for our individual goals. Huuuggggeeee!
In the fourth and final article in our series on how millennials should be saving and investing, we will dive into your investment options. Stocks, bonds, ETF’s, mutual funds, commodities, the whole shebang – yes, I just said shebang. We will also discuss investment vehicles like 401k, 403b, IRA, Roth IRA, HSA, individual investment accounts, etc.
So, subscribe to The Cincinnati Financial Planner blog and stay tuned as we tie this thing up!
If you’re looking for some help, or want someone to confirm that you’re 100% on the right track, then check us out at TruWealth Planning and schedule a free intro consultation.