It’s time for a reality check! Why an appropriate understanding of risks is important for independent investors like you…

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: American writer Mark Twain once said, “History doesn’t repeat but it does rhyme.” In the context of investing, we can think of this as there is no better preparation for managing money and building your net worth than having a firm grasp of financial history. Sure, there might be differences to the way the markets are now compared to before when the real estate bubble, the dot-com craze, and tulipmania happened a few centuries ago. However, arming yourself with a sufficient understanding of history and human psychology will give you an edge as an independent investor. Keep reading to know how you can improve your understanding of risks and increase your chances of avoiding investment mistakes that could hurt your family’s financial well-being. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

It’s time for a reality check! Why an appropriate understanding of risks is important for independent investors like you… How many times have you heard the phrase, “No pain, no gain?” This is usually used to describe something you don’t really want to do but you should do regardless of what you think or feel. The concept of “no pain, no gain” can be applied in the context of investing because in investing, there are always risks. With those risks, you may experience some pain but you may also experience gains along the way. Speaking of risks, here’s a reality check: All investments carry some degree of risk. Stocks, bonds, mutual funds, and exchange-traded funds can lose value if market conditions turn sour. Even the most conservative and insured investments pose some inflation risks. When you invest, you make choices on what you would like to do with your financial assets. Risk is any uncertainty that has the potential to negatively affect your financial welfare. Regardless of the type of investment you choose, there will always be risks involved. As an independent investor, you must weigh potential rewards against risks to decide if it’s worth putting your money on the line. Here are two common investment risks: Losing money. This is the most common investment risk. If you want to avoid losing money in the future, you may opt to make investments that guarantee you won’t lose money. However, that would mean you have to give up most of the opportunity to earn a decent return in exchange. Example: US Treasury bonds are backed by the US government, making them the safest in the world. Bank certificates of deposit (CDs) with a federally insured bank are also secure. But there’s a consequence to this security… The price for this safety is a very low return on your investment. Try calculating the effects of inflation and the taxes you pay on the earnings. You’ll see, your investments may return very little in real growth. Falling short of your financial goals. Some factors that determine whether or not you’ve reached your investment goals are the amount invested, length of time invested, rate of return or growth, fees, taxes, and inflation. If you don’t want to have many risks in your investments, then you have to accept earning lower returns. To compensate for that, you must increase the amount and length of time you invested. Allow me to share with you a tip: Many investors find that a modest amount of risk is an acceptable way to increase the potential of achieving their financial goals. By diversifying your portfolio with investments with various degrees of risks, you take advantage of a rising market and protect yourself from dramatic losses in a down market. Here’s the thing in investing: You cannot eliminate investment risks. However, there are strategies that can help you manage systemic risks (risks affecting the economy as a whole) and non-systemic risks (risks that only affect a small part of the economy or a single company). Below are two of these strategies: Asset allocation. By including various asset classes in your investment portfolio, you increase the probability that some of your investments will provide satisfactory returns even when others are losing value. Additionally, you’re reducing the risk of major losses that can come from over-emphasizing a single asset class. Diversification. When you diversify, you divide your money to a particular asset class such as stocks. Diversification, with its emphasis on variety, allows you to spread your financial assets around. In other words, you don’t put all your investment eggs in one basket. It’s also important for you to know that your investment risk changes with your age. For instance: Younger investors can afford higher risk than older investors because they have more time to recover if the market declines. If you are five years away from retirement, you might not want to take extraordinary risks because you only have little time left to recover from a significant loss. However, you should be careful too because a “too conservative” approach may mean you don’t achieve your financial goals. It may not be evident at first why these concepts are important to you as an independent investor, but studying them, adjusting for them, and putting them to work in your own endeavors can help you become a good investor. Not just that! These concepts can also help you grow your bank balance year after year. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! It is always a smart idea to do your homework before making critical investment moves and to keep doing your homework to ensure your original investment plan remains unchanged. Learn more about Buy and Homework Investment Strategy on next week’s The Independent Investor!