Research shows that at least three years ago, Americans were risk averse, across generations. But there’s a lot of truth in the old saying, “No risk, no reward.” Proper and appropriate investment risk taking is critical to financial success.
A recent history of risk attitudes
Risk aversion is a pervasive attitude in all areas of American life. and, study We found that risk tolerance declined from 2009 to 2019, likely due to the aftermath of the 2008 financial crisis.
2019:
- 38% of Americans are more worried about taking financial risks for themselves than they were 10 years ago
- 65% were less comfortable taking risks in their career
- 76% would prefer to live in one place, even if it means missing out on positive career advancement and income-boosting opportunities.
And when it comes to investing, the vast majority of Americans, or 79%, preferred lower risk, more stable savings and investments.
This data is several years old, but is probably still relatively accurate. Finla reports that while the negative stock market returns in the first quarter of 2020 impacted many investors, investment interest remains high, with the vast majority seeing no change in their willingness to take risks. It is said that there was not.
Isn’t risk aversion a good thing?
Is risk aversion good or bad?
The answer is that it depends, but avoiding all risks is never a good idea, especially when it comes to investing.
According to experts, one of the biggest risks in financial planning is not investing in volatile portfolios, but avoiding them altogether.
“Let’s talk big risk, risk avoidance,” says Leon Lovebrek, a certified financial planner at LJPR, LLC, based in Troy, Michigan. “We often see customers sitting with cash on their hands, stuck in the next ‘big recession.’”
While everyone’s investment strategy is different, financial planners agree that even in the worst of economic times, taking a certain amount of risk is critical to maintaining a healthy and growing retirement portfolio. says.
Tips for keeping risks in perspective
There are several things to consider when deciding whether to take risks in your investment portfolio.
1. Is the stock trending upwards or downwards?
As of August 2023, the stock market appears to be recovering from a major downturn. This is somewhat surprising given that we are still emerging from a global pandemic, inflation is high, and until recently there was talk of heading into recession.
No one knows what will happen to the stock market. There is no crystal ball to tell you. Regardless of what happens in the market, the best thing to do is understand your investment objectives and plan what you will do if a burst occurs. Learn about the benefits of creating an investment policy statement.
And here are 10 surprising moves to make if the market crashes.
2. Remember: no risk, no return
No risk, no return, that’s the watchword for financial planners, says Rick Kagawa, a certified financial planner and president of Capital Resources and Insurance, based in Huntington Beach, Calif.
“No risk in an investment is the same as no return,” he says. “If you don’t have a profit, you have to come up with all the money for whatever your goal is.
The most common risk-free account is a bank account, he added, pointing out that there has never been a time when you could make money with this means of saving. “The reality is that money in bank accounts is being eroded by inflation and taxes,” he says.
You may still think your bank account is safer than investing in stocks, but stocks could plummet again and your investment could be hit hard. But most of the time you are wrong.
3. Yes, the market has fallen, but it has always risen
Stock markets go up and down in the short term. In the long run, historically, nothing has been done except on the upswing.
Even at worst, even if the economy shrinks in a year or two, it is likely to eventually recover.
And even if the market were to catastrophically go bankrupt forever, money would probably mean nothing in such an apocalyptic event. We will have much, much bigger problems to worry about.
4. Keeping pace with inflation requires some risk
When you work, your salary should be proportional to inflation. So if costs go up, so should salaries.
However, after retirement, it is common to spend a certain amount of life with savings. If you are investing risk-free, you may struggle with your ability to spend your money. The return on investment should be at least equal to, if not greater than, inflation.
If you don’t take some risk, you basically lose money.
Learn more about inflation risk.
5. Don’t Let Fear Rule You
The worst thing you can do is let fear decide where and what to invest in.
“I think the big risk is fear, and history tells us that fear itself is what we should really fear,” Labrek said.
6. It’s important to take calculated and balanced risks
Of course, you don’t have to put all your money into stocks and see how it plays out. Instead, invest in well-diversified portfolios and take calculated risks.
Nearly one-fifth (21%) of Northwestern Mutual Planning and Progress Study survey respondents said they prefer to take calculated risks in pursuit of higher returns.
However, these risks also need to be balanced by certain “low risk” investment vehicles. Scott Hanson, a certified financial planner at EFS Advisors based in Shaw Review, Minnesota, says deciding which vehicle to invest in depends on when you need the money.
“For long-term funding, choose higher risk, higher reward mutual funds and invest them in Roth IRAs,” he says. “For the money you need immediately, [take] risk.Please keep this in cash or on CD [certificates of deposit], or low-term government bonds. You won’t gain much, but you won’t lose much either. And be careful not to put too much money in this pot. ”
The key is to take some risk while keeping some money in a “safer” investment vehicle.
7. Consider a Bucket Strategy
A bucket strategy is allocating funds into different buckets. Some of your funds are invested with higher risk, while other amounts are invested in safer types of investment vehicles.
Learn more about bucket strategy here.
8. When it makes economic sense not to take risks
As a general rule, we start mitigating market risk around the age of 55, depending on when we retire. To do this, Michael Black, certified financial planner and owner of Scottsdale, Arizona-based Michael Phillips Black Wealth Management, said the goal was to avoid expensive drawdowns. It states that you should use a managed account. .
“Once you’re in distribution mode, it’s very important to avoid big movements in the market,” he says. “After retirement, avoiding drawdowns is more important than achieving a decent return.”
So it’s not surprising that baby boomers (ages 51-69) are significantly more risk averse than Gen X (ages 34-54) and millennials (ages 18-34).
In fact, 83% of baby boomers are willing to reduce risk to ensure the security and stability of their savings, even if the return potential is lower, according to Northwestern Mutual research. became clear in
In contrast, 74% of Gen X and 71% of millennials feel the same way.
9. Work with a financial advisor
A Northwestern Mutual study found that American adults who worked with an advisor had an average risk tolerance of 5.2 on a scale of 1 to 10, while adults without an advisor had an average risk tolerance of only 4.6. Ta.
Trust the experts. These will help you have a healthy attitude to risk.
10. Understand diversity
Different investment classes have different objectives. Stocks are good for growth if you have a long-term view. At the other end of the spectrum, life annuities are designed to guarantee income, not for profit.
You want to spread your funds across a variety of assets that meet your personal needs.
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