What’s Your Risk Point?

Every morning when I get ready for work I decide, based on the time and how much of a rush I am in, what route to take.  What I am considering is the amount of risk I want to take.  It’s a two part risk question.  First, based on the time, there can be varying amounts of traffic and varying degrees of aggressive drivers.  Second, based on how late or early I may be running, I am more or less willing to take a ‘faster’ route.

I think we mentally balance risk throughout the day with many of the tasks we do.  Is it a risk to call this person and not that person?  Is it a risk to dress casual for the day or to wear a suit/dress?  Is it a risk to wear the higher heels to go out or should the lower heels be worn?  We do this mental balance so subconsciously it is a part of our second nature.

Somehow when we have to consider how much risk we want to take with our retirement funds or our personal investment money, the decision can seem overwhelming.  What we have to do to get the decision back into the second nature realm is to keep it simple.

First, consider what would keep you up at night if your finances were not safely tucked under the mattress.  Second, learn the history and the risks involved with the investments you are considering.  Third, know your time horizon–how long you want to keep the funds invested before you need them.  Fourth, set aside a portion of your funds to have readily available in either a checking or savings account.

If you do the above steps, you should be easily able to determine how much risk you can take.  If you need an emergency fund of available cash, keep that money in cash/checking/savings.  If you have additional funds to put aside for retirement and you don’t plan to retire for 20 plus years, weigh the pros and cons of various equities.  You should be able to weather the ebb and flow of the equity market and be able to garner better growth over the long haul than if you kept the funds in fixed income.  If you worry about having too much money in equities, balance them out with fixed income.

The main thing is to truly understand what would worry you and stick within your own guidelines.  Don’t let someone else tell you what would be best for you or what you should do before first knowing what risk you can tolerate.  When you have that figured out, everything else will fall right in place.