Part 1. Determining your risk profile.
I love chess and that may make me a nerd, but I am okay with that. However I know, my ability to play chess, is why I will be successful in obtaining my goals.
In chess, we have to think a few moves ahead. You have to see the entire board. You have to know what your opponent is doing and anticipate where they might move.
The path to obtaining generational wealth is like playing chess. You have to move the pieces (investments) in anticipation of achieving a larger goal.
To get started with chess, you need to know yourself. This applies to life as well. And if it applies to life, it definitely has meaning in investing. You have to know how much risk you can stomach and what your personality is.
For me, I can stomach a lot of risk, because I can always see the end goal in sight. I never lose track of it. So if it means I lose a pawn or two, so be it.
Everyone’s risk profile will look different. In general there are three types of profiles.
The Conservative or Low Risk Investor
Folks who have a conservative risk profile are those who prefer stable money with very minimum ups and downs. These are the folks who okay with not beating the market as long as they don’t lose money. If they purchase an individual stock, they won’t sleep well at night because they know that the possibility of losing their money is too high. They prefer stable investments, such as, certificates of deposits, high-yield savings accounts, municipal bonds, and maxing their contributions in the safety of employer-sponsored 401Ks.
This profile is perfectly fine. These folks are the Bishops of the chess board. Their investments travel in a straight line and if you are not paying attention, they will be across the board in no time. They aren’t flashy investors, but they will become millionaires by persistent dedication to savings and dollar cost averaging in safe investment vehicles.
The Balanced or Medium Risk Investor
When you are a balanced type risk profile, you are the equivalent of The Rook. You are flexible, can change direction when need be, go far, but you don’t stray too far off of course. You are always traveling in a straight line. You’re okay with some risk, just not putting it all out there at once to lose overnight. Majority of investors are of the balanced type.
The Dynamic or High Risk Investor
This is the Queen. You are willing to take the risk and put yourself out there but in doing so understand that you may be exposed. You are okay stomaching that risk. You can’t sleep at night after buying a stock because you are excited about the possibilities of the increases in your portfolio.
You look for investments that will provide big gains and are willing to look past the high risk associated with the investment because YOU KNOW it will pay off in the future. You are invaluable but also vulnerable.
Your risk profile is important. Before you start investing you have to recognize that investing can cause stress. Do not put your money in something that is going to cause you stress. ITS NOT WORTH IT.
Remember this is a long game. Financial Independence and generational wealth are not created overnight unless you’re drafted in the NBA. Most of us are not 7-footers with a soaking wet jump shot.
We have to play the game and play it well. IT’S CHESS NOT CHECKERS.
If you are unsure of your risk profile, you can take a quick quiz and find out pretty easily.
NEXT TIME: PART 2. Choosing your portfolio allocation.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
Follow us on Social Media