The Beginner’s Guide to Investing: Understanding Your Risk Tolerance

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Erica HIll

When looking to invest for the first time, it is important to understand what you want to invest, where you need to invest it, when to invest it, and why you are investing it. The first subject you want to consider when assessing your risk tolerance is what goals you have in mind for your investments. The second subject you want to consider is your risk personality to help determine the level of comfort you have with varying degrees of risk.

Creating Your Goals

An eighty year-old person looking to stabilize his/her investments versus a twenty-two year-old who is just starting his/her career will certainly have different levels of risk they are willing to take. The eighty year-old is looking to make low-risk investments that will probably earn a much lower interest rate, say of one or two percent, while the twenty-two year old is earning his/her full living from the job he/she has. The twenty-two year old may be willing to invest a large chunk of his/her savings with a higher interest rate that is more risky, because he/she does not need the principal nor the interest for a long time.

Knowing your financial position will help you to make a sound financial strategy and list of investment goals. If you are a billionaire, who makes $5 billion annually, you may choose to invest $3 million in the blink of an eye without much thought to it. This objective is vastly different than, let’s say, newlyweds who are looking to save for their first house. The billionaire might decide to invest in a risky real estate investment, while the newlyweds might decide to invest in bonds or CDs. Identifying your goals will become clearer for you once you understand your investment personality.

Assessing Your Risk Personality

One’s investment personality is defined by two specific character traits. One is simply how daring and risky are you, while the other is about how much time and effort you’re willing to invest into researching before deciding on a particular investment.

Risk is defined by the possibility of loss on your investments. The rewards you might receive are defined by the possibility of earning greater returns than you invested. If you are the kind of person who likes to live life on the edge, experience new adventures constantly, and have great confidence in your decisions and thoughts, then you might be willing to take on higher-risk investments. If you, on the contrary, are the kind of person who likes to make sure you are stable, secure, and have low worry/stress, then you may want to make an investment that is lower risk, which unfortunately has lower immediate rewards. This decision is extremely personal and can only be determined by you. Here are a handful of risk factors you should take into consideration:

  • “Market risk,…
  • “Business risk,…
  • “Political risk,…
  • “Currency risk,… [and]
  • “Concentration risk.”

If you are unsure as to how risky you are, take this risk tolerance quiz.

Are you afraid of getting your hands dirty just yet? Try this free investment simulator, provided by Investopedia, to see how you would do if you had $100,000 to invest!

Come back in a few weeks to see the next installation of “The Beginner’s Guide to Investing!”

7 Money Camps that Ensure a Child’s Safe Financial Future

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In today’s educational system, is it now required in 80% of states to have some sort of financial education. Paul Sullivan of the New York Times states, “A study published in 2009 by two researchers at the University of Wisconsin, Madison, called “Teachers’ Background and Capacity to Teach Personal Finance,” found… that most teachers did not feel qualified to teach a financial literacy course.” When we are entrusting the entirety of our children’s financial literacy to teachers who do not know how to teach about finances, it is important to take matters into our own hands. Knowing how to manage our own finances is absolutely vital to a stable and healthy life. This starts to show when people do not handle their finances well, and they get themselves into debt without any investments to help support them.

Sullivan goes on to share the importance of financial literacy for children so that they can deal with financial issues as they grow. Some say that going to financial camps as children do not stick well enough in children’s minds, but Lewis Mandell says differently:

“Lewis Mandell, a professor of finance and dean emeritus at the State University of New York, Buffalo, who has done research on financial literacy for children, said,… ‘The literature shows that kids may not remember [teachings about what happens when you practice poor financial skills], but when they become adults and get to practice a range of financial activities, it comes back.’”

If it is true that the memories of financial camp do come back, then that means children who go to these camps will be that much more likely to handle their finances in an informed and educated manner.

Most money camps aim to integrate children from all socioeconomic backgrounds to deal with financial issues that they may or may not have in their own lives. Some children are given anywhere from $30,000 – $120,000 to manage per year. This starts to show them that having or not having money can be a difference of stability or no stability as they grow up. Not all money camps are like this, however. Some are invite-only. Here is a list of money camps one can check out for their children this summer, which are the following:

  1. Camp Start-Up
  2. Camp Millionaire
  3. Moolah U
  4. My Life, My Money
  5. Wall Street Summer Camp
  6. Young American’s Center for Financial Education
  7. Invite-Only Camps

There are camps that are invite only. These camps are created for the children of millionaires by companies such as Merrill Lynch, Citi Bank, and HSBC. There is a rich camp held at The Wharton School of Business at the University of Pennsylvania for $10,000.00. They are sometimes, “offered as a free service or marketing tool for big clients. The price of admission: to qualify, families must hold investable assets between $25 million and $100 million.” These camps are secretive, as they do not want to divulge who has what amount of money to the public.

No matter which camp we send our children to, there is something fun and exciting at each of them. There are ways for children to work in a certain “industry” for the week that is interesting to them, while others enjoy the games they get to play, while at the camp. Regardless, financial camps can be absolutely essential for children as they grow up and learn to make, spend, and invest their own money.

Visa Launches Financial Literacy Initiative for Olympians – and More?

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My previous posts on this blog have focused on the importance of teaching children about money management from a very young age (three years old, to be exact – find out why here). Something I haven’t really touched on yet, though, is the fact that most adults, both here in the US and around the world, have never received a financial education like the one I’ve outlined, and are thus financially illiterate themselves. For proof, just look at the US subprime mortgage crisis, which likely would not have happened if more people had known how to manage their money responsibly, or how to determine if a potential investment had integrity before they signed their life savings away on the dotted line.

Erica Hill Keller Williams

Does a new Visa initiative represent the start of a global push to increase financial literacy? Only time will tell – but we can hope so.

The National Financial Educators Council (NFEC), an important organization that I’ve mentioned before on this website, has created a National Financial Literacy Test to find out just how financially illiterate each generation of Americans is in 2016. The test was originally designed for 15-18 year olds, but it has been administered to US residents of all ages, and quite frankly, the results are troubling, to say the least. This is mostly because the data shows no marked difference between the financial literacy of older Americans and that of our school-aged children, which shows that we are still not making enough of a concerted effort to teach our children about finance. We can see this quite clearly when we compare the average test scores of 10-14 year olds with the average scores of 25- 35 year olds, 36-50 year olds, and 50+ year olds. The average 10-14 year old scores a 54% on the NFEC Financial Literacy test; this is unsurprising, though disheartening, because this age demographic has yet to worry about their own personal finances the way they will when they get a few years older. Still, the average 25-35 year old only scores a 72% on the test, less than twenty percentage points higher than their younger counterparts – and the results aren’t much better in older Americans. Amongst 36-50 year olds, the average score is 73%, and in 50+ year olds, who perform the best on the test of any age group, the average score is still only a 77%. I’ll remind you again that this test was created for 15-18 year olds – scary, isn’t it?

This is why I was so excited to hear about Visa’s new Global Financial Education Initiative for Olympic athletes, which they’re debuting at this year’s Olympic Games in Rio. According to an August 4th press release, “The new program, Practical Money Skills for Athletes, will utilize Visa’s award-winning financial education program and curriculum focused on key personal finance topics including financial planning and decision making, goal-setting, budgeting and saving, understanding banking services, and basic money management. Financial education workshops for athletes will initially be available in English, French, Portuguese, and Simplified Chinese, and will feature presentations, skill-building activities and multi-media components.” What great news – and what a great idea for a program!

I can already think of so many different and valuable ways that an initiative like this one could be expanded on and adapted to teach people of all ages how to manage their money. I hope that this Visa program represents the start of a global push for financial literacy – but in the meantime, not to fear: I’ll still be here, posting about different ways that you can take your financial education (and that of your children) into your own hands.

The Strong Case for Early Financial Education

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As any parent of a school-aged child can attest to, one topic that is conspicuously absent from most school curriculums is personal finance. Despite the fact that understanding one’s financial responsibilities is a basic life skill, for some reason, it is not only a topic that is rarely covered in the classroom, but it is one that is barely discussed at all until adulthood, by which time it is often too late to instill smart habits for money management without the added stress of having to apply these lessons in real time to real bills that are mounting by the day.

I am a strong proponent of the belief that we should start to educate our children about finances as early as possible, thereby demystifying the world of money management and imparting valuable advice that will stay with them for the rest of their lives. All too often, though, the process of getting the ball rolling on a financial education is so daunting that parents don’t know where to start. When we talk about a financial education and developing financial literacy, then, it helps to break the topic down into 4 areas of knowledge:

Erica Hill Real Estate

Teach financial literacy by turning money management into a game.

  1. How a person makes money
  2. How to manage the money you’ve made
  3. How to invest your money to turn it into even more money, and  
  4. How to donate your money.

Each of these topics opens a dialogue about much broader issues that children should be exposed to early on. For example, if you’re teaching your child how a person makes money, you can introduce her to the topic of work salaries and how her paychecks will be taxed before she receives them. When it comes to imparting wisdom about how to manage the money you’ve made, you can use this opportunity to teach your child about the importance of saving, how to financially plan ahead for her future and why and how to avoid the trap of falling into credit card debt. And while investing is often considered to be the purview of the rich, this is not only misguided, but also causes millions of people to lose out on potential income every year. We can correct this perception by teaching our children about investing in the form of a game, which will both demystify the process of investing and make it an appealing prospect to children from all socio-economic stratas. Finally, with financial education, we have the power to raise future generations who will view donating to charity not as a luxury, but as a mandatory component of money management, thereby creating a world in which charities and nonprofits have a much larger pool of funds to pull from to do good.

The fact of the matter is, only time will tell if these important lessons are incorporated into school curriculums. Until that day comes, it is our responsibility as parents to teach our children about finance in the home if we want to re-shape the way we as a society understand how to manage our money and put a stop to the financial ignorance that is causing so much of the world’s economic problems today.