Assess Your Risk Tolerance

EXCITING NEWS: I was selected to deliver a national training in San Francisco this November entitled: Personal Finance Solutions for Busy Mental Health Professionals. This 3 hour workshop includes material from my upcoming eBook. Stay tuned to get first crack at the NEW EBOOK. And it’s FREE to my readers.

“Risk comes from not knowing what you’re doing.” Warren Buffett

I’ve been investing for many many years. In my 20’s all I could think about was “the great depression” and how so many lost so much. Although I had a Bachelor of Science degree in Economics and had taken a class or 2 in the stock market, I was scared of stock investing. I was terrified of risk and I certainly didn’t know much about investing.

As I acquired some cash, I went to visit a stock broker who respected my preferences and introduced me to some bonds and bond funds. He introduced me to the dollar cost averaging  and answered my investing questions by loaning me his investing training manuals. After dipping my toe in the investing pool, learning a bit about investments, and watching my net worth grow for a while, I gained some confidence. A lifelong passion was born.

MAIN TOPIC; Risk tolerance THEN and NOW

Although my investment portfolio went up and down, I got used to the volatility. I was still afraid of “losing it all,” but learned through study, that if I diversified my assets, the ups and downs of my portfolio would even out. I didn’t know it at the time, but my RISK TOLERANCE was governing my investment decisions.

For those of you just starting out, or learning about investing, start with introspection. When your investment value goes down 10-15%, are you a nervous wreck? Does this small percent drop in your portfolio terrify you and keep you up at night? If so, you need to titrate your portfolio to honor your temperament.

WHAT THE HECK DOES THAT MEAN?

Riskier assets with more ups and downs usually offer HIGHER RETURNS.

Stock investments: Individual stocks, stock mutual funds, international stocks offer the possibility of greater returns along with more risk.

Bond investments: Individual bonds, bond funds, corporate, and government bonds offer lower returns and less volatility.

SOUNDS SIMPLE; JUST INVEST IN STOCKS, GET HIGHER RETURNS.

OR –  SCARED OF RISK? INVEST IN BONDS AND ACCEPT LOWER RETURNS.

Wait a minute, not so simple.

These investing maxims have held up over the long term IN THE PAST; but what about the last 5 years? According to Morningstar.com,  during the last 5 years, bonds outperformed stocks by a large margin.

5 YEAR RETURNS-annualized

Morningstar US Market Index-0.67%

Morningstar Core Bond Index-6.04%

Practical Application: What should I do?

Are you totally confused? To summarize, long term stocks offer higher return with more risk; bonds have lower returns and lower risk. But in the past 5 years, stocks had high volatility and low returns and bonds outperformed stocks by a huge margin.

Welcome: DIVERSIFICATION

Those rules of risk and return have held true in the past over the long term, > 10 years.

 NO ONE KNOWS WHAT TYPE OF RETURNS AND VOLATILITY THE MARKETS HOLD IN THE FUTURE.

Protect your investments by spreading around the risk.

During the past 5 years, if your investment portfolio looked like this:

50% STOCKS

50% BONDS

Your annualized return would have been 3.36% with moderated volatility.

The lesson is to choose investment funds in a variety of asset classes. The ups and downs will balance out and moderate the returns and risks.

Conventional wisdom recommends a greater percent of your investment in stocks if you are younger and can tolerate more risk. If you are older and/or more risk averse, raise the percent of bond assets.

Continue reading this series and you will learn how I invest our family assets.

BEFORE YOU INVEST YOU MUST READ 10 STEPS YOU MUST TAKE BEFORE BEGINNING AN INVESTING PROGRAM.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Take a RISK TOLERANCE QUIZ or 2 and jot down whether to weight your portfolio more toward stocks or bonds.

MSN Money Risk Quiz 

 Risk Tolerance Quiz from Rutgers University site by 2 finance professors (Source: Grable, J. E., & Lytton, R. H. (1999). Financial risk tolerance revisited: The development of a risk assessment instrument. Financial Services Review, 8, 163-181.)

image credit; purplemattfish

RECENT PERSONAL FINANCE CARNIVALS & Link Round up

I am honored to have my work showcased at these sites recently. Why not stop by & check out the fine articles?  

 How to Design a Budget with Room for the Fun Stuff was selected for a link round up at KNS Financial

Carnival of Money Stories at Eventual Millionaire published No Brainer Money Management for College Students

Carnival of Wealth at Personal Dividends posted Follow these Instructions and Get Wealthy

YAKEZIE PERSONAL FINANCE BLOGS

After every article for the next several weeks, you will be introduced to several Personal Finance web sites in the Yakezie network. Each one has their own unique voice and style. The consistency in all is their desire to help others. Consider visiting a few each day!

My Personal Finance Journey
Narrow Bridge
Not Made of Money
One Money Design
Out of Debt Again
Parenting Family Money
Peak Personal Finance
Personal Finance by the Book

Originally published on March 21, 2010

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic; Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peak at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

The first time I really studied this type of data was in 1993.  Although I had been investing for a while prior to that time, my husband was still skeptical. I wanted to convince my husband of the importance of putting money into the stock market so I prepared some data for him. Fortunately, for us he was convinced by the historical information, so we boosted our investing at that time and have watched our investments grow over time while continuing to contribute regularly to our investment accounts. 

 But what does this return mean in real dollars? 

Consider this, if you are in your 20’s, 30’s, or 40’s you have many years until retirement. You can stick some money in a brokerage account at one of the discount brokers (like Fidelity, Vanguard, Schwab, or  TD Ameritrade), invest that money in an S & P Index mutual fund or ETF and forget about it. Fast forward 20, 30, or 40 years, it is highly likely that your investment will have grown substantially! Even Rumplestilskin could try this and probably wake up a rich guy after sleeping for a really long time! 

Certainly, it is better to INVEST REGULARLY and not just one time! 

Now, I don’t recommend that you run out and stick the money into the account tomorrow unless you have a bit more financial knowledge. Continue to read BarbaraFriedbergPersonalFinance and before you know it you will have the skills to grow your net worth. 

Practical Application; How do I Proceed?     

• Here is the takeaway from this post: 
• The more time you have, the greater chance you have to get wealthy. 
• Over time, the stock market has been a wonderful way to accumulate wealth. 
• Since the stock market is very volatile, only put money into the market that you can leave there for 5 years or more. 
• Invest only in stock index mutual funds or exchange traded funds (ETF’s) unless you have a lot of money and want to devote hours per week to researching individual stocks. 
• For the best low effort long term returns, AUTOMATE! Have a regular amount automatically transferred in to a brokerage account each month from your paycheck or bank account.    

Action Step: 

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans. 

Grow your emergency savings to 6 months of living expenses in a bank savings account or money market fund by transferring automatically from your paycheck or checking account to a savings account. 

CAUTION: This post if for educational purposes and is not advice to run out and buy a stock mutual fund! Before investing, it is really really important to gain some basic financial education. And before sticking any money in investments you need to have savings for emergencies and no consumer debt! Think of this post as part of your lessons in “financial literacy.” Read this blog regularly, try out the action steps, and learn the basics before you start investing. Keep reading and become financially smart!

How has the recent stock market volatility affected your investing activity?

Active vs. Passive Management

Categories: investing, wealth, stocks, mutual funds

“Wall Street Pares Gains as Bargain-Hunters Retreat,” Associated Press, July 6, 2010

Today we are focusing on stock investing only. Unfortunately, many of you out there read headlines such as this one and believe you must rush out and BUY OR SELL. After all, if the headline is screaming at you, it must mean something.

Act on the headlines at your own peril.  

You might see your stock investment plummet, get nervous and want to ACT. Read on and see how being passive works out in the long run.

MAIN TOPIC: Why you Must Ignore the Investment Headlines

Raise your hands if you watch CNBC, Jim Cramer, or any investing program. Who here checks on their stock and mutual fund prices daily; and scours Yahoo Finance and MSN Money for financial news?

Now, don’t be shy, you know who you are. You think you are being very diligent and keeping up with the market and your investments. Well, you’re wrong.

• Are you trying to beat the market performance?
• Find the hottest stock?
• Get rich quick?

Stop right now. There is a better way, with a greater chance of yielding long term wealth.

In this class, you will learn:

• The historical performance of the stock market and why it matters.
• Stock market facts & what they mean about getting wealthy.
• How being passive leads to wealth.

PRACTICAL APPLICATION: Active Managers are Losers

 Over 20 years, the S & P Index beat 68% of all actively managed funds.

In other words, most investors in actively managed mutual funds with “professional money managers” (who regularly bought and sold stocks) had worse returns than investors who stuck with unmanaged INDEX FUNDS.

Active managers believe they can outperform the indexes with their superior stock picking ability. In reality, any fund with an active manager(s) has higher costs than an index fund. That means right off, they have to beat the index substantially in order to cover their larger expenses.

Active managers frequently demonstrate superior performance for a year of two. Do you think it typically continues for the long term? NO it does not. Many research studies show that actively managed mutual funds with outstanding performance one year have subpar results the next.

Active managers are the ones who listen to the headlines and jump in to buy or sell based on “the news.”

 This ACTIVE strategy yields long term UNDERPERFORMANCE.

The economy goes up and down and so does the stock market. Expect these ups and downs and do not be surprised by them.

Since 1960 there have been 9 Bear Markets (decline of 20% or more in the overall stock market). In spite of these declines, the S & P 500 had an annualized return of 10.05% from 1926 to 2007.

Let’s look at the Active vs. Passive investing debate another way.

HOW MUCH WEALTH MIGHT YOU HAVE EARNED BY INVESTING IN THE STOCK MARKET as represented by the S & P 500 Index? 

What about the longer term, does this theory still hold?

DO NOT JUMP IN AND OUT OF THE MARKET.

Do you know when the market will have the biggest increases? Of course not, no one can predict the future! The lesson is this; active management leads to worse returns than simple index investing.

TIME IN THE MARKET is the best way to get rich.

Start now and continue investing. Buy an index fund  or two, continue with regular investing, and if history is any guide, over time you will become rich.

Investing terms:

Stock Market: Usually refers to an index of many stocks or bonds which serve as a proxy for the total stock market. The most common index for stocks is the S & P 500.

Active management: Buying and selling stocks or bonds in an effort to outperform the overall market.

Passive investing: Invest in index funds in order to minimize fees and expenses and match the overall market performance.

Are you an active or passive investor? How is your investing strategy working out?

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Read this article before investing any money.

When you are ready to invest, commit to regularly  contributing to a stock  mutual fund as part of your overall investment plan.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

YAKEZIE SHORT CARNIVAL:

What’s a good car price and why should you keep it a secret? @Car Negotiation Coach

Condom Factory and Bonds: What’s the Connection  @The Millionaire Nurse Blog    

Bankruptcy is not a Sin @ Financially Poor

The 4 Worst Ways to Impress Your Boss @ Sweating the Big Stuff

Categories: investing, stocks, saving, mutual funds 

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic  

 Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peak at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

The first time I really studied this type of data was in 1993.  Although I had been investing for a while prior to that time, my husband was still skeptical. I wanted to convince my husband of the importance of putting money into the stock market so I prepared some data for him. Fortunately, for us he was convinced by the historical information, so we boosted our investing at that time and have watched our investments grow over time while continuing to contribute regularly to our investment accounts. 

 But what does this return mean in real dollars? 

Consider this, if you are in your 20’s, 30’s, or 40’s you have many years until retirement. You can stick some money in a brokerage account at one of the discount brokers (like Fidelity, Vanguard, Schwab, or  TD Ameritrade), invest that money in an S & P Index mutual fund or ETF and forget about it. Fast forward 20, 30, or 40 years, it is highly likely that your investment will have grown substantially! Even Rumplestilskin could try this and probably wake up a rich guy after sleeping for a really long time! 

Certainly, it is better to INVEST REGULARLY and not just one time! 

Now, I don’t recommend that you run out and stick the money into the account tomorrow unless you have a bit more financial knowledge. Continue to read BarbaraFriedbergPersonalFinance and before you know it you will have the skills to grow your net worth. 

Practical Application    

Here is the takeaway from this post: 

ü      The more time you have, the greater chance you have to get wealthy. 

ü      Over time, the stock market has been a wonderful way to accumulate wealth. 

ü      Since the stock market is very volatile, only put money into the market that you can leave there for 5 years or more. 

ü      Invest only in stock index mutual funds or exchange traded funds (ETF’s) unless you have a lot of money and want to devote hours per week to researching individual stocks. 

ü      For the best low effort long term returns, AUTOMATE! 

ü      Have a regular amount automatically transferred in to a brokerage account each month from your paycheck or bank account.    

Action Step: 

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans. 

Grow your emergency savings to 6 months of living expenses in a bank savings account or money market fund by transferring automatically from your paycheck or checking account to a savings account. 

CAUTION: This post if for educational purposes and is not advice to run out and buy a stock mutual fund! Before investing, it is really really important to gain some basic financial education. And before sticking any money in investments you need to have savings for emergencies and no consumer debt! Think of this post as part of your lessons in “financial literacy.” Read this blog regularly, try out the action steps, and learn the basics before you start investing. Soon, I will cover other investing topics such as: Bond investments, international investing, dollar cost averaging, diversification, and asset allocation. Keep reading and become financially smart!

“A festival marked by merrymaking and processions.”

Definition of carnival

I would like to invite you to a PERSONAL FINANCE Carnival. There will be lots of personal finance information and tips, and for those of you interested in more money and a better life……..IT WILL BE FUN!

What is a PERSONAL FINANCE CARNIVAL?

It’s a place where lots of authors publish articles about personal finance topics.

In one LOCATION you can get information about TAXES, CAREER, REAL ESTATE, CREDIT, DEBT, FRUGAL LIVING, SAVING, BUDGETING, INVESTING, FINANCE, and MONEY MANAGEMENT.

Why should I go?

• To learn 101 MONEY MANAGEMENT MYTHS
• To get some cash from Tips to Make Money on Craigslist
• To Get Rid of Debt Once and for All
• To gain access to a wealth of tips, information, and ideas to improve your finances and your life!

How long will it take?

• As long as you want!
• You choose the articles you are interested in.
• Read the posts at your leisure, and come back at any time.

Where is the CARNIVAL?

• It’s right here.

What are you waiting for?

Go have fun at the carnival!