Take Control
Social media has amplified the narrative that becoming wealthy should be a quick process. This has skewed the perception that individuals have and made it more commonplace for people to take large risks with their finances. It’s important to remember that when it comes to financial markets, risk and reward are directly correlated. In order to achieve higher returns, you must be willing to take on more risk.
Good financial advisors are aware of this and help ground their clients with realistic expectations. Building wealth sustainably through investing is an incredibly slow, but extremely powerful process. Over periods of decades, you should see results. This is often hard for people to grasp in practice. In theory, it makes sense.
"Investing is risky, there is no way around that."
Compounding is what leads to growth, and the more money invested, the more of an effect compounding has on top of the principal. A common mistake that investors make is seeking the highest return rather than the most sustainable return over a long period of time. This is where risk-adjusted returns take center stage. Investing is risky, there is no way around that. The question is, how are we measuring risk? Are we defining risk as volatility? That can be a type of risk, but it’s not the most accurate measure for the long term investor. For a short term investor, it is the primary risk.
Understand Your Risk Tolerance
If we define risk by not meeting financial goals (such as retirement), then it is actually more risky not to invest. You have more to lose over a long period of time. Since everyone has a different financial situation, there is no one-size-fits-all approach to investing. This is why social media tips and tricks can be destructive to individuals. What may be good advice for one person could be terrible advice for another.
Consulting with a financial professional is generally a good idea. However, the individual must be willing to research the person they take advice from and understand their fee structure. One of the common complaints and drawbacks of wealth management is the ongoing fees that they take from clients. An assets under management fee on top of expensive mutual funds could be the difference between you buying a new sports car or your advisor getting one. This is why it’s important to understand your risk tolerance, psychology, and what you are signing up for. The biggest risk in investing tends to be behavioral. If you know you’ll react emotionally during a market downturn, it may make sense to get some outside help to keep you on track.
