💀 Scare Index, Investing and Risk 😱
Halloween is one of my favorite holidays. In my little town, it is well known that I, Jessica Perrone dresses up in full costume and will be scaring the kids. I've even heard it said that trick-or-treaters can hear my patented cackle from blocks away! But over the years, after a few little kids went running away in terror, I realized I had to level the amount of "scare" by age group.
The "jump out of the bushes" tactic I use on teens is most undoubtedly inappropriate for a toddler too timid to walk up to a stranger dressed up as a pirate. Sometimes, my costume is enough to make those little ones start crying just looking at me! Awwweeee😭 So I created a scare index by age group. It looks something like this...
Scare Index by Age:
Children: No Added Scare. The little ones are typically scared just by my costume & makeup. It is best to be friendly, because parents usually must coax the kids to say trick-or-treat.
Pre-teens: I can start laying the scare on.
Teens: I have all kinds of tricks for the BIG SCARE…. I will not disclose my trade secrets, but I ramp it up for the big kids because their fear tolerance is much higher than the other age groups.
You're probably wondering, "Jessica, what does your scare index have to do with investing?" Stay with me here!
When you go to a financial advisor or open a robo-advisor account for the first time, they ask you a series of questions. These questions are designed to gauge your Risk Tolerance. According to Bank Rate, "Risk tolerance is your ability and willingness to stomach a decline in the value of your investments." The concept of risk tolerance is eerily similar to the scare index I used for the trick-or-treaters. It gauges how scared you are of a decline in the markets!
Like my trick-or-treaters' scare tolerance, it is essential to understand your risk tolerance before investing. Investment vehicles have various levels of risk or scare factors as well. Your risk tolerance will help gauge the type of asset classes that would be the most appropriate for your situation.
Gauging your Risk Tolerance:
Time Horizon The sooner you must withdraw 20% of your investments, the lower your risk capacity.
Attitude Toward Risk What is the worst twelve-month percentage loss you would tolerate for your long-term investments.
Net worth The more assets you have, the more capacity you have to withstand a market decline.
Income and Savings Rate The higher your after-tax income, the higher capacity you have to withstand the risk of an extended market correction.
In summary, before you start investing, it is helpful to understand your risk tolerance and the risk index of various assets out there. Some vehicles are more "scary" to an individual with a lower risk tolerance due to their volatility or the amount the asset's price moves around.
We visit this concept in "Investing for Beginners," and I invite you to sign-up for the class. It's a spooky good time!
May The Markets Be in Your Favor
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Disclaimer: Jessica Perrone is not a registered investment professional nor a financial advisor. This content is for educational purposes only and is not investment, tax, or financial advice. Always do your own research. You are solely responsible for all investment, tax, and financial decisions that you make. Please read the full disclaimer here.