Save Yourself with Risk Management
If you consider yourself a ‘conservative investor’ then perhaps it’s time to reassess your level of financial intelligence.
There is one question that insurance agents will ask if you are teetering on the edge of being under-insured, or gamblers will ask themselves as they put a wad of cash on the blackjack table, and first-time skydivers grapple with: What level of risk am I comfortable with?
When it comes to working with financial planners or stockbrokers, they’ll always want to know about your risk tolerance—aka, if you’re conservative or aggressive—when discussing your investments. Unfortunately, they don’t even realize that’s the wrong question to ask.
The question the financial planners should be asking: Are you educated or uneducated when it comes to your investments?
Saying you are “conservative” is just a risk management excuse that could easily be translated to, “I’m uneducated, scared, don’t know what to do, and don’t want to take the time to learn.”
Think about it: If you tell your financial planners you are a conservative investor, they know right away that you are uneducated about investments. It’s a dead giveaway that allows those with a dubious moral compass to pray on your weakness and sell you whatever they want! Sadly, thousands of uneducated “investors” hand their money over to financial planners every year.
You see, the conventional wisdom of most financial planners is: “The higher the return, the higher the risk.” But that’s not really true. I’ll tell you what is true: The lower your financial intelligence, the higher your risk; and the higher your financial intelligence, the lower the risk. And that’s why it’s crucial to improve your financial intelligence—it’s the only way to truly learn how to reduce investment risk.
Gambling vs. financial education
When you’re investing in true cash-flow opportunities, you’re in the driver’s seat. This means that you know how to manage your money, what to look for, and the appropriate actions to take when an opportunity presents itself. You have control over your decisions and your cash, and this improves your chances of increasing your wealth. That’s risk management at its finest.
Now, we’ve all heard the one-off stories of success in a scenario where there was no control. There are always those lucky people who win at the casinos and come home with a small fortune. The same goes for some investors who hand over all of their money to a financial planner, spouse, or family friend and do well.
Gambling may seem like an easy way to make money, but it’s very risky. On the other hand, getting a financial education to increase your cash flow is not difficult and the rewards usually far outweigh the risks.
When it comes to my life, I want financial freedom, and the only way to experience it is to have complete control over my cash without relying on luck or anyone else, for that matter.
Another way to assess investment risk
So many people mistakenly think that investing is risky when in reality it’s the investor who is risky. Think about it: An investment is just an investment, whether it’s a business, a property, a stock share, or a commodity. It’s you, the investor, who determines if a specific investment is a good or bad investment for you.
If you’re wondering how to reduce investment risk, start by knowing this: Not every investment you choose will be a good investment, as no investor has a 100% track record of picking winners. Yet, the more knowledge you have, the better your odds for reducing investment risk.
Plus, if you have done your research, you will know why you are making a particular investment and what is happening with the money you invest. If you just turn your money over to a financial planner to invest for you, you lose control, and when you lose control, your risk factor goes up significantly.
Here’s another way to examine this theory: Is a car going 25 miles per hour driven by an experienced driver risky? Probably not. Take the same car and the same speed driven by a drunk driver and that same car becomes a weapon. It’s not the car; it’s the driver. It’s not the investment; it’s the investor.
As you might imagine, my own risk tolerance is pretty low. I don’t like taking risks with my money. We study, we research, we build up our experience.
Redefining what risk means
Warren Buffett says of risk, “Risk is not knowing what you are doing.” Again, the keyword here is “you,” not the investment.
Over the years, I’ve come to define RISK as:
My friend and stockbroker, Tom Weissenborn, offers these two rules when it comes to investing in stocks:
- If you don’t understand how the company makes money, don’t invest in it.
- If it looks too good to be true, then it probably is. Just like my own folly once upon a time, Karen learned this particular lesson the hard way.
As you’ve learned, in the world of investing, there are no investments that are 100% guaranteed to be safe (free from losses), but there are things you can do to reduce investment risk and increase your chances of success:
- Give yourself a financial education
- Gain hands-on experience by actively investing (a small amount of) your money
- Understand the investment and the return on the investment
- Have control over your investments
- Become your own financial advisor
All of us make mistakes when it comes to investing. Once you increase your financial education, you can invest the way you want based on your personal goals. More important, you can take control of your finances and reduce the risk involved with investing.
Risk management starts with a financial education
Whether you turn your money over to a financial advisor or control your own investments, there will always be risks involved. However, you increase your investment risk when you have no financial education, don’t understand what you are investing in, let others keep the majority of the returns, and depend too much on others to control your investments.
Your investments are “safer” when you get a financial education, actively invest your money in investments you understand, get the majority of the returns, and become your own financial advisor. Managing your money properly means managing risk properly.
What are you going to do today to take control of your money and make better investment choices?
Hopefully, the answer is: get a financial education. If you don’t know where to begin, it’s as easy as 1-2-3:
- Immerse yourself on the topic. Learn about investments that put money in your pocket. This information is easily accessible online, at libraries and local investment clubs, workshops, events, books, and more.
- Start small. Practice what you learn when the stakes are low. For example, there’s no risk involved when you learn by playing the CASHFLOW® game.
- Take action. There comes a point in every woman’s life when you just have to stop sitting on the sidelines and take that big leap forward!
Once you have a financial education on managing money and take action on what you learn, you can expand your cash flow infinitely! That’s a lot better than hoping for a big, one-time win in Vegas.
Editor, Rich Dad Poor Dad Daily