In this blog, we’re going to discuss financial risk and its relationship with investment. But first, quick, quick update. I started the need to grow about this show. It’s gold, say yes to fire altogether and in lowercase letters.
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No further ado, let’s dive in
We’re going to get lost in Wall Street. But hey, we’re going to find ourselves back or these we’re going to try the very first concept that I want to discuss with you today that I think it’s very important to understand his financial risk.
Have you ever stopped to think? What is your risk appetite? So how much money can you afford to lose? Three years ago, I had no idea. And it wasn’t actually until I lost some money that I reflected on it. It was very painful, like really painful.
So I want to help you not to make the same mistakes. And then we’re going to think about this and reflect now because it’s really important. So what is financial risk? financial risk is your exposure to financial loss. So the profitability to lose the money that you have invested.
And don’t get me wrong. This is not an easy concept to figure out, especially if you hate confrontation with yourself. So let’s say let’s make this easy. Let’s ask ourselves or interior selves this question.
what is your risk appetite?
I personally use two rules of thumb to decide how much money or how much of the total my money or my capital may stash of cash, of course, I missed. The first rule is what I call the ah rule of thumb. And it goes like this.
You should invest the percentage of your total capital that is equal to 100 minus your age. So I am 27. So I’m going to invest 100 minus 27 equals 73. I’m going to invest 73% of my total capital or my total net worth, there is this library action and probably you heard about it, which is instead of using hundreds use 110.
So I would do 110 minus 27 83%. But as you can see, is a bit less conservative. So I personally decided to go with the 100 minus my age. This is my first reveal to grit, guys, I invest approximately 73% of all my money.
The second rule of thumb
which is actually what I call the safety net rule of thumb goes as follows You always always, always have to give three months’ worth of your total monthly costs in your current bank account, or in a deposit that you do not touch.
So let’s say that I spend 1000 euros per month. So if I apply this rule, I will keep 3000 euros in my bank account, not in the stock market, not in crypto in the bank. Safe and sound, I’m probably gonna get many questions around these numbers.
why three months?
Why 100 minus your age, these are rules of thumb that work for me. And they might have worked for you. And you might want to find your numbers. As I say, I’m talking from my own experience. And for example, right now, I do not have any big financial responsibilities.
I do not own property. I do not have kids, as a parent, but that’s a completely different financial responsibility. So, yeah, maybe maybe I’m at the age that I want to invest 73% of my capital, and save in, let’s say, in a safe deposit, or, I don’t know, in an account that gives me like a small percentage.
And you might be in a completely different situation. So it’s important that we understand at what stage in life we’re in. And we try to find our own numbers, because at the end of the day, only you will know what’s best for you.
This is hard for me to adhere to this role. Sometimes, because as soon as I get my salary, I get super excited of like, I don’t know, these new cryptocurrency going and then there’s like the super cool stog that is gonna boom.
I don’t know, it’s hard to focus. So what I do is I sit with my sound like, Suzanna, we’re going to set aside this money into the deposit like we agreed on. Sometimes it gets tough. I mean, between the, let’s say, smart design, and the not so smart isn’t.
So then I just run to my boyfriend and I begged him to press confirm and send the money to the deposit. I mean, that works for me, of course, can have other tricks.
Now, guys, it’s a time that I want to introduce my dear friend, volatility. We have some sort of how the way gold is, like, love-hate relationship. I mean, we still haven’t quite figured it out yet. And probably you haven’t either. But it’s okay guys, we can share. I mean, there is enough volatility in the market share.
So no biggie
What is volatility? volatility is an I quote Investopedia here, a statistical measure of the dispersion of return for a given security or market index.
The first time I read this, I was like, Damn, guys, I just realized that volatility is let’s say how fancy statisticians measured the markets in the session. Or the people investing in the market indecision.
When they trade they invest. And usually, the higher the volatility, the riskier the product or the security. That’s why a lot of people say that crypto is super risky.
Because it’s super full Adele. And that I can assure you enhance hear from all of these comes the hate against volatility.
Have you ever heard of the expression, high risk, high reward? what it means, like in practical terms, is that you can make use of people’s indecision, or the absent downs of the markets to make money.
And I 100% agree with that. volatility is scary, I’m not gonna lie. But if you know your shit, you can have one of those jackpot moments. And now it’s the perfect time for one of my young Susanna stories.
About a year ago, the volatility was very high, of course, because of COVID and all the uncertainty that surrounded that. I wasn’t Investing or well, doing shenanigans in the stock market, when I was watching some YouTuber saying, you can trade options, and you can get very rich very fast. And I was like, Hey, rich, where, when, how.
So I googled how people get rich with options. I mean, it looks fun. So I went, I went deep into it, I went into the banking app that I use for investing.
I tried to buy an option
An option is a contract, that it’s only valid for a certain period of time, a day, a month, year mean, it’s usually set. And it’s basically an agreement between two parties on the price of the underlying security.
I’m not going to go deep into options in this episode in this episode, because it’s complex, and it’s not my point. So let’s leave it at it is it’s an agreement on the price of the stock. And they say it’s valid for a certain period of time.
And it tends to be for them. I wanted to buy the option. But, of course, because it’s risky, let’s say compared to stocks, my bank made me do an exam, which I found out that it’s pretty normal to do an exam online via the telephone, but okay.
I studied, I pass the exam, and then I was ready to buy my first option. And I went long on a stock, which basically means that I was speculating that the price will go higher. The literally next day, someone important got Khurana and boom, volatility extreme, and buy option.
I was a bit demoralized. But I was like, you know, it went wrong. Let’s try again, I’m all about second chances in life. So the second time, I bought the Tesla option, and I again went long, thinking that the price would go higher.
And then on musk actually tweeted something, and boom, I made some big money. Well, big money, big money for me. Let’s see, not for wall street guys. And I was like, Oh my god, I love options, blah, blah, blah.
This whole story
I mean, the point of this story, of course, was entertainment for you guys. Good laughs here. But I also wanted to prove the point that volatility can go both ways. It can go well, and it can go not that well. You can’t know what you’re doing.
Or you cannot know what you’re doing like me. And then and then it’s like full luck. But the point is that it’s better to know what you’re doing.
And you need to be aware 100% of your risk appetite before, let’s say going deep into investing is very important. I think this is a good moment to bridge into the next concept that I want to discuss with you guys.
And this is the relationship between risk and investment. Let’s say if you have big responsibilities that involve money, like kids, a mortgage, or a hefty student loan, you’re probably not looking for a high-risk investment. And you think more of let’s say long term investing.
As we have established, volatility is positively or directly proportional to risk. So risk-averse investors want products with low volatility.
And what are those products, you might ask? bonds, for example, bonds are instruments with a fixed income that represent loans, especially government months are very low risk.
They have low volatility. And they even give you a small interest for lending your money to, for example, a good cos from the government.
Buy bonds through your normal broker
And that can be like it doesn’t have to be a person that you go to with it can be your investment app like I do or an online broker. You can also if you’re a risk-averse investor You can also put your money in a low-risk mutual fund.
And as I was talking about in the previous episode, a mutual fund is usually fully managed. So you wouldn’t have even to worry about what is low risk, where’s a high risk, they would choose for you. And they would probably put your money into bonds or ETFs.
And here comes the very popular and famous ETFs, which stands for exchange-traded funds. These are securities that track indexes, sectors, commodities like they basically track things.
The difference between the mutual funds and the ETF is that, on the one hand, mutual funds only trade once per day, and usually at the end of the trading day.
So by close up the market, and ETFs are actually open the whole time that the market is open. And why, let’s say ETFs are less risky than stock, for example. Well, that is because the ETF itself because it tracks, let’s say an index or a sector.
It contains multiple underlying assets, which can be stocks, for example. So if you’re really into technology, and you’re not very sure about what to invest in, you can always invest in an ETF that tracks the sector of technology in a certain region, for example, or in certain markets. And basically, ETFs are the perfect example of expression.
Don’t you ever put all your eggs in one basket?
Diversify, guys? Yeah, so that. And that’s very cool for people who really don’t want to, I don’t know, do a lot of research into stocks or just prefer the bullet and track some sort of index, commodity, or sector. So far, bonds, very low risk, we also have to say, different flavors.
So for mutual funds, we have ETFs. All of these products are for people who value more, let’s say the financial instability having less risk.
And, yeah, basically, risk-averse investors. Usually these investors, they like, but the money there, and they just hold it forever, they just leave it there. And if the economy grows, you can get a good return on 1% 3% 5%.
I mean, it really depends. It really depends on who you ask, but you get something, you can grow your capital in this way. But if you like to ramble a bit more, you can go for stocks, which is a huge category.
I mean, we have, let’s say risky stocks, which are usually called penny stocks, like jumia, fastly, Palantir. I mean, these are tech stocks. But examples are you can have you can go through a list of blue-chip stocks.
Traditional Market Place
Which are the most traditional ones, like Microsoft, Amazon, Google, I mean, those like really big companies that are, let’s say, safer, and you know that they’re well established. I’m going to prepare like a whole episode just on stocks who don’t worry, I’m not going to really go deep now into it, but it’s going to be there.
So just hold on. And, guys, if that’s not enough for you, you can also go for more risky products, like options or fewer bars for example.
These instruments are volatile, and they use the whole concept of leveraging your investment and that’s nothing more let’s say than a multiplier to go to your investment that it can go with both ways they can multiply or they can be but it even doesn’t go that well.
And finally for let’s say the craziest and the risk is a few. We have crypto My beloved crypto, which also 100% deserves one episode one full episode. It’s gonna come hold on the time will come let’s not be impatient. This is not a sprint is a marathon towards financial independence and early retirement.
Time’s up guys
I’m super excited also to tell you that in the next episode, we’ll have a guest here with us I’m not going to reveal a lot, just that he’s an engineer.
So, guys, we can trust him. He’s working in tech, and he’s super into personal finances and investment, and super passionate about economics.
I asked him here to talk about his long term investment strategy, his vision, and he’s going to give us some practical tips, some tricks, and some final surprise, as always, so tune in also in the next episode, and for now, have a nice day. Have a nice night. Until next time.