By Amanda Mitchell, AFC® Candidate
What is your relationship with money like? What do you feel when you think about the things you do with your money? Are you at ease? Do you have feelings of anxiety?
Our emotions can largely drive the things we do with our money. Having a better understanding of why we do the things that we do can help us make better financial decisions and improve our relationship with our money. That’s why during the month of May, I will explore different money mindsets and how each can affect financial well-being. First up, is my kryptonite, risk aversion.
What is risk aversion?
Risk aversion is the concept that the risk of losing looms greater than the possibility of any gains. Now, risk aversion has its place in a healthy money relationship. It can keep us from spending all of our money on lottery tickets or throwing our entire life savings into a risky investment. It can be the flashing red light that tells you that you had better do your homework before making a particular decision.
But it keeps me from losing my money. What is wrong with that?
Have you ever heard the phrase, “you have to crack a few eggs to make an omelet?” Same concept. The name of the game is informed risk mitigation. I grew up in a family with a lot of money stress. Seeing those I loved always worrying about money made me constantly worry if I had enough. I started hoarding my money and just putting it all in a savings account. It took me a very long time to even consider doing anything remotely riskier than that. The stock market was entirely out of the question for me. Even putting my money in a CD scared me because I did not have access to the funds at all times.
But then, in my undergrad studies, I had to take a personal finance course. I learned about how investing worked and its importance in establishing long-term wealth. The idea that I could put my money to work to earn me more money really blew my mind. Over the next few years, I tried to learn as much as I could about investing and work my way to a point where I was comfortable doing it. It wasn’t easy to overcome the money mindset I had developed. Here are some of the steps I took to help overcome my fears:
- I did my homework. I learned all I could about different investments. Understanding the processes and how everything works made everything seem less scary.
- Military OneSource offers free training courses on different money topics, including investing. You can find them here.
- I talked to people I trusted about which investments they used.
- Free financial counseling is offered through your installation’s community service office. Also, the Coordinated Assistance Network offers free remote financial counseling, which you can find here.
- I started small and incorporated investing into my monthly budget. I only put a portion of my savings allotment into investment accounts to allow myself to become more comfortable with the idea.
Ways to Mitigate Risk Aversion
- Use it as a tool to keep you motivated. Risk aversion boils down to a fear of losing. Keep your big picture in focus and create very specific goals to help you achieve them. Remember what is at stake if you do not follow through.
- Do your homework. The more educated you are, the better decisions you will make. Grab some books from the library and learn how to read financial statements to perform due diligence before you decide to invest in a company.
- Start Small. You don’t need thousands of dollars to invest. You can start with whatever amount you are comfortable with.
- Start with your TSP. All of the different funds within the TSP are made up of various investments. Read up on them and choose which best suits you. There are tons of resources on tsp.gov to help you better understand each fund.
- Get Help. Visit your installation’s community service and talk to the financial counselors there. They may be able to offer referrals to a local financial planner who can provide help specific to investing portfolios. A financial planner can help you put together a portfolio that fits your particular needs and is in a risk range that you are comfortable with.
- Check your investment portfolio less. Try to avoid watching your investment portfolio like a hawk, especially when there is a downturn in the markets.
- Don’t be a day trader. Resist the urge to sell as soon as there is a downturn in value. While some have made an entire career of day trading, it is not a viable investment strategy for most of us. A critical piece to gains in investing is a long-range strategy. Also, short-term transactions with investments are taxed more harshly than long-term ones.
In the end, it is all in what you are comfortable with. It may take a bit of time before you get to a point where you are comfortable enough to consider investing, and that’s ok. What is most important is that you are setting realistic goals for yourself and are planning for the future.