There’s been a gradual yet tectonic shift in how people manage their money. Over the past few generations, more and more women are taking their seat at the table when it comes to making important financial decisions.
“Long-term financial decisions and impactful monetary issues aren’t just for men anymore,” said one expert at Reliant Investment Management. And what truly sets this independent investment advisory firm apart is their belief that educating men and women about finance and investments empowers them to take control of their financial position. To put it simply, you don’t have to have a mustache to have moxie with money — and that’s an idea we can get behind.
So, in our new series, Money Moxie, we’ll ask Reliant questions about money, finance and investments to equip you with the knowledge you need to own your financial future.
Today’s topic: Risk.
SB: So what is risk and how does it affect my finances?
Risk is something we all have to deal with and face every day. Getting into a car, boarding an airplane, talking politics — all of these activities have some risk, but that doesn’t stop us from doing them. When it comes to your finances, the most common questions we hear are: Will I have enough money to retire? and Am I going to lose my money by investing in the stock market? There are many risks associated with these questions, but being aware of them is the first step to moderating their impact on your financial life. The two main risks these questions deal with are inflation risk, which affects your dollars being worth less over time, and market risk, which affects the changing value of your investments.
SB: Those risks seem so different — how do you approach them?
Everyone incurs inflation risk, but only those who choose to invest incur market risk. Your groceries are no doubt more expensive today than they were just a few years ago, and the same will hold true going forward. Investing, particularly in stocks, has historically been a very strong way to combat inflation risk because it allows you to increase the value of your invested money over time at a rate higher than the rate of inflation. Inevitably you will incur market risk by investing in anything, but you can strategically lessen its impact on your portfolio. Truthfully, though, the key to mitigating market risk starts with understanding and assessing your own risk tolerance.
SB: Okay, what do you mean by risk tolerance? How do I know what mine is?
Generally, your emotions and feelings determine your willingness to take risks, and there is no right or wrong way to feel about that. Some people are more inclined to throw caution to the wind and risk it all, while others are far more comfortable taking as little risk as possible. It is vital that you are very honest with yourself and your investment manager about where exactly you stand so that your money isn’t invested contrary to your comfort level.
Having said that, your comfort level with risk-taking shouldn’t be the only factor you consider. While your willingness to take risks is important, your ability to take risks is equally important. Factors influencing your ability include your time horizon, the amount of money you have, your goals and objectives and your age. For instance, someone in their 70s who has just retired after working 50 years has a lower ability to take risks than a person in their 30s with another 40 years to work. When determining if an investment is right for you, an investment manager should always assess its appropriateness within the context of your willingness — and ability — to take risks.
SB: The stock market just seems so risky right now. Is it really safe to trust it with my money?
Did you know that in the past 80 years the stock market has yielded negative returns just seven times when using 10-year holding periods and has never yielded negative returns for periods of 20 years? We believe that when you invest for the long haul in a diversified portfolio, the benefits of investing in the stock market will outweigh the risks. The stock market is not like going to Tunica or Vegas. Some worry that investing in the stock market is more like gambling because of the risk that you could lose everything overnight, but the data tells a different story.
Sure, the stock market will go down sometimes, but historically it has always bounced back. Just take a look at these numbers:
- 5 years after the Great Depression the stock market was up 228%
- Remember the crash of 1982? 5 years later the stock market had rebounded 155%
- The tech bubble burst in the early 2000s, but 5 years later the stock market was at new highs
- Since the low mark of the Great Recession in 2009, the stock market has climbed more than 200% through the end of May 2018
SB: I didn’t know the market tends to recover so well, but the downturns are still scary. How can I prepare for those times?
One of your best tools is a good investment manager who will build you a diversified portfolio of high-quality companies with proven track records. By acting as an insulator against a single stock or sector’s poor performance, diversification allows your portfolio to absorb market ebbs and flows. Remember though, investing is a long-term engagement, not a get-rich-quick scheme. Patience pays off! Warren Buffett is famous for saying, “If you aren’t willing to own a stock for 10 years, then don’t even think about owning it for 10 seconds.” The stock market is a powerful tool that yields the best returns to those who are patient and in it for the long haul.
SB: There’s no doubt that a lot of our readers lived through and felt the effects of the Great Recession, and maybe they just aren’t comfortable taking the risk associated with investing. What would you say to them?
Well, there is a great risk in doing absolutely nothing with your money. Like we talked about earlier, inflation risk, or purchasing power risk as it’s sometimes called, arises from the change in the value of the dollar over time. When inflation rises, your purchasing power falls, because it takes more dollars now to buy tangible goods than it did in the past. Due to an inflation rate of about 2% each year, $100 in 1998 has the same purchasing power as $65 today. That’s a 35% reduction in value over 20 years! Rather than sticking your money under your mattress for years and having it be worth significantly less in the future, investing can provide protection for you by increasing the value of your money at a rate higher than that of inflation.
It is normal to have worries related to investing when you feel like you don’t understand financial markets or the various risks associated with them. It’s also completely normal to have reservations about financial markets given the crisis we all went through a decade ago. But we’d argue that doing nothing over the long term is far riskier than investing in a diversified portfolio that allows you to grow your hard-earned money at a rate above inflation. A good investment manager is your best tool to help you understand your tolerance for risk, moderate your reservations about investing and build a portfolio that fits your unique situation.
Have a question about finance or investments? Ask Reliant! Email us at [email protected] or give us a call at (901) 843-0600.
Reliant Investment Management, LLC is an independent investment advisory firm that provides customized portfolio management and comprehensive financial planning tailored to each client’s unique needs and circumstances. “Money Moxie” is intended to share opinions and general knowledge about investments, financial markets, and wealth management. “Money Moxie” is not personal advice for any specific situation and should not be construed as such. Past performance is not indicative of future results or returns. To set up a free consultation regarding your personal financial circumstances, please contact Reliant Investment Management at [email protected] or (901) 843-0600.
This article is sponsored by Reliant Investment Management, LLC.