Why It’s Important to Know Your Risk Level before You Invest

Why It’s Important to Know Your Risk Level before You Invest

Understanding your risk level is one of the most important parts of financial planning. Here’s why: Imagine you’re playing chess and you’re about to move your queen to a particular square. Making this specific move may put pressure on your opponent’s king, but when you look at the entire board (the big picture view), you see that you might also lose your queen in the process. Is your possible gain worth the risk of losing your most important piece? You need to evaluate the risk-reward ratio of your move… both in chess and in investing. Risk of loss vs. possible gain Generally in the finance world, the riskier the product, the greater its potential for gain – and loss. Every investor needs to balance the odds of losing money against the possibility of a profitable outcome. Ask yourself: What would I do if one of my investments dropped 20% in value? Would I be able to continue meeting my financial goals? Would I sell and lock in the losses or do I have the time before I actually need to use the money, such as when I retire, to hold the position (or another) and try to recoup the losses? It helps to avoid euphemisms. “Risk” is simply a more acceptable way of saying, “you might lose money.” Among financial analysts, common synonyms for the word “lose money” are “market correction” or “adjustment.” These expressions can make losing money sound more palatable.  However, when you want to understand your own risk level, don’t ask yourself if you could survive a 20% drop in your account. Try using more specific... Click for more
How to Protect Your Money from a Market Crash

How to Protect Your Money from a Market Crash

Market crashes are inevitable. Just as they happened in the past, they are also likely to occur again in the future. So what should you do to protect yourself from a volatile market? Chess strategy can help you deal with volatile markets The following anecdote, from the world of chess, provides an insight on how to deal with a bad situation (like a market crash) when it occurs: In November 1986, the World Chess Federation (FIDE) decided to intervene in the chess rating system. In an unprecedented event, they granted all woman chess players 100 extra bonus points – except for Susan Polgar. They claimed that since she competed mainly against men, she did not need the extra points. Besides the unfairness and humiliation that it caused, FIDE’s decision hurt Susan’s ranking and she was displaced from the top of the list of world-class chess players. But instead of giving up, Susan continued to work hard to regain her top position. She earned her Grandmaster title and became the world champion. Susan’s sudden and unexpected loss of her rating could be compared to a stock market crash, which can also be unpredictable and sudden. If your stock portfolio takes a dive, it is important to hold onto your stocks if the fundamentals are still sound. The moral of both Susan’s story and how to react to a downward trend in the market is the same: bad things will happen, but if you give into despair it will be difficult to get back on course again. Is there anything you can do before the market crashes? While moving on and... Click for more
Why Now is a Good Time to Review Your Finances

Why Now is a Good Time to Review Your Finances

When did you last review your finances? I’m not referring to checking to see how much cash is in your wallet, but a comprehensive review including your retirement plan, investments, and bank statements. Just like a chess player constantly reviews tactics and strategies in hopes of improving his game, it’s important to review your financial situation on a regular basis to improve your investment performance. By keeping up to date with what’s going on with your money, you can make real-time adjustments as the market and your personal circumstances change. One of my most popular blogposts, “Why You Need to Review Your Financial Plan”, discusses the importance of regular financial reviews. This blogpost is still as relevant today as when it was just published. Click here to read it and find out why conducting a financial review on a regular basis is so important!   Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, is an avid chess fan, international investment advisor and Certified Financial Planner (CFP®).... Click for more
What Hindsight Teaches About Investing in the Stock Market – Rich As A King Episode 136

What Hindsight Teaches About Investing in the Stock Market – Rich As A King Episode 136

One of the reasons investing in the stock market is so difficult is because we can’t predict the future.  The trick is to use hindsight to help you determine what will be. While past performance is never a guarantee of future results, if you were able to invest in the stock market 50 years ago, would it have been a worthwhile investment? Take a look at how the world’s economy and standard of living have developed over the past 50 years. When deciding where and how to invest, it’s important to look at the market’s potential and not only at its past. Looking at the potential of every country’s economy is just like how a chess player examines the potential of every... Click for more
Can You Benefit From the Strong U.S. Economy? – Rich As A King Episode 134

Can You Benefit From the Strong U.S. Economy? – Rich As A King Episode 134

As America is a world leader in energy production and technology, the U.S. economy is one of the most powerful economies on this planet.  America is also one of the world’s largest consumer markets. If you are tempted to benefit from the growth in the U.S. economy by investing in American companies, consider following this chess strategy. Also download a free tool to find out what your risk tolerance level is.... Click for more