Don’t risk it: Get familiar with investment strategy
There are many ways to invest your hard-earned money, but the goal is always the same: to grow your wealth. But a recent survey conducted by Harris Poll on behalf of the AICPA found that many Americans are embracing high-risk strategies that put their savings in jeopardy while doing minimal, if any, financial research upfront.
David Almonte, CPA, member of the AICPA’s National CPA Financial Literacy Commission, spoke to AICPA Insights about the survey results and what Americans should know about investing strategy.
What was your initial reaction after seeing the survey results? Was there anything that stuck out to you?
David Almonte: I was both surprised and concerned by the results. I was especially surprised that nearly half of Americans say a volatile market offers an easy way to make a profit. And that concerns me because it also offers an easy way to lose a lot of money in a non-diversified or overly aggressive portfolio.
The steady market gains from the past several years, though good for the average investor portfolio, run the risk of making people feel safe without considering the downsides of investing in a volatile market. The past year or so at a minimum has been an extremely volatile time in the stock market — where the market will rise or fall at the drop of a tweet. For less educated investors, it can be dangerous because they may be investing based on information gained from fake news articles. Or they’re investing in extremely volatile vehicles such as digital currencies without knowing the market or understanding personal risk appetite.
How can someone new to the market distinguish between investing and speculating?
DA: Investors need to be aware of the amount of risk undertaken in each type of investment and the corresponding returns associated with such risk. When an individual invests in a speculative stock, he or she must be ready to lose the entire investment — potentially very quickly (which could happen when investing as well, but usually losses occur over time, if they were to occur). On the other hand, speculating can bring much larger returns, but you’re opening yourself and your portfolio up to a lot more risk in return of chasing higher profits. Speculating can be part of your portfolio, but a very small part. The amount of speculative investments in your portfolio will depend on your personal risk tolerance.
For those investors who may need to start at the beginning, how can they evaluate their own personal risk tolerance to guide an overall investment strategy?
DA: Think about how you would feel if you lost $5 from your wallet right now. Would you be sad or mad? How much would it bother you, or how bad would it hurt you financially? What about $50, $100 or $1,000? The lower the dollar amount that would bring pain to you and your portfolio, the lower your personal risk tolerance.
When it comes to investing, the rule of thumb is that the younger you are, the more risk you can handle because you have the most important thing in the investing world on your side: time. If you are five years from retirement and deal heavily in risky investments, you could lose everything with no time left to make it up.
How would you describe the current state of the market and what it means to the average investor?
DA: The market is up… no, wait; it’s down… no, wait; it’s up again. There’s a reason experts say to invest for the long term. If you’re investing consistently, over time, the bumps in the road tend to smooth out. There is no place for emotion in the investing world, as good stocks will go down, and bad stocks will go up — sometimes for reasons that can be very difficult to tell.
For the average person just getting into investing, where should they start to educate themselves?
DA: The best time to get educated about financial markets is at an early age so you can grow comfortable with the concepts and terms before you make your first investment. However, it’s never too late to learn. Growing up, my family had annual stock market competitions where my four brothers and I each got $1,000,000 (fake) to invest over a six-month time horizon. Whoever had the most money at the end of the time frame (again, fake dollars) won a prize. Financial verbiage was in my blood pretty much since birth. But for many Americans, this may not be the case.
I suggest people begin by understanding their personal risk tolerance, defining their investing time horizon and researching different types of investments. And don’t be afraid to ask an expert for help and advice along the way. We all work hard for our money, and a better understanding of the basics of investing means that we can have our money working for us.
The AICPA’s 360 Degrees of Financial Literacy website is full of free resources investors can use to evaluate their personal financial risk tolerance and create an investment strategy to match. The website also offers tools to educate investors on the stock market.
**the above insight is background information and not intended as specific investment advice
Jon Lynch, Manager, Public Relations, Association of International Certified Professional Accountants