What’s your take on financial risks? Every investor has some level of involvement, but where's the balance?

Does financial risk keep you awake at night, or do you stay calm when markets fluctuate? According to the 2023 State of Women survey, our relationship with risk is complex. Women are divided: 12% see themselves as risk-averse, 59% identify as risk-aware, while 30% consider themselves risk-accepting. So, how should we view risk in our financial lives, and how can we tackle it with a clear perspective?

Understanding Women's Risk Perspectives

Historically, women have tended to be more cautious than men in investing. This stems from a tendency to assess potential pitfalls before making decisions, as explained by a financial strategist. “We often focus more on negatives, and women tend to worry more,” she notes.

This cautious mindset extends beyond investments to careers. Women often question their qualifications for a role, while men might ponder what could go wrong instead of considering the positives.

While a certain level of caution can be beneficial, letting fear dictate your choices can lead to missed opportunities.

“Women dislike losing money, just like anyone else,” a financial planner emphasizes. “However, you need to invest. Keeping all your money in cash poses its own risks, especially with inflation rates,” he adds.

Speaking of inflation…

Current Financial Concerns

Aside from the usual worries about market fluctuations, several pressing issues are on our minds for 2024. Inflation continues to rise, making life more expensive, but we also face uncertainty regarding the long-term economic outlook, and upcoming elections add to the noise, according to a financial advisor. “Everything feels extreme now, heightening our fears,” she observes.

Yet, it’s essential to remember that the world is constantly sending unpredictable challenges our way. “Stability is an illusion,” the strategist states. “We must be ready to endure the unknown to see gains.” This means that adopting a healthy attitude toward risk involves tuning out the noise. “Avoid obsessively reading every headline,” she advises.

Especially during an election year, with economic volatility, it’s tempting to consider staying in cash as the safer option. That’s a mistake. “Historically, the S&P 500 has always ended higher at the conclusion of every presidential term,” she points out. “If you let fear of a particular president drive your decisions, you'd miss out on substantial gains.”

Learning from History

Looking back at the past century, the S&P 500 has consistently risen despite wars, upheavals, and financial crises.

“Investing can feel overwhelming, but understanding historical market trends shows that most downturns are temporary,” the strategist explains. “While volatility can be unsettling, the market ultimately rebounds.”

Many novice investors struggle to see beyond short-term trends, often fixating on one- to five-year periods that can appear troubling. “However, zoom out, and you’ll realize you're likely to fare well in the markets,” a financial planner advises.

Strategies to Mitigate Risk

First, ensure your investment portfolio is well-diversified across various sectors and asset classes. Depending on your financial timeline, consider a basic allocation of bonds and equities, like 50/50, 60/40, or 70/30. “If you plan to buy a house in three years, don’t take risks,” he cautions. “But if retirement is decades away, you can embrace more risk.”

Shifting to investment areas, some market segments are riskier than others. The key is recognizing these risks and avoiding them when possible.

Interestingly, you don’t have to spend endless hours analyzing the economy. Just observe changes in your daily life. “Remote work is now a permanent trend, resulting in reduced demand for urban office spaces. Similarly, online shopping is on the rise while traditional shopping centers decline,” she notes. This indicates that commercial real estate in those sectors may not be wise investments in the near future.

On the other hand, consider areas poised for growth based on current spending habits and global trends. “The shift toward green energy suggests that electric vehicles may thrive. If you're encouraging your kids to learn about AI, it’s a hint to invest in AI for the future,” she remarks.

“Choosing investments can be daunting due to the various factors influencing stock prices. However, simpler options exist. Investing in diversified index funds, low-cost ETFs, or target-date funds offers broad market exposure, lowers risks tied to specific companies, and provides peace of mind. You need an investment strategy that allows you to rest easy at night.”

Assessing Your Risk Tolerance

If you’re losing sleep not over your current investments but about the opportunities you might be missing, it may be time to embrace more risk. A quick assessment: subtract your age from 110. If your stock allocation doesn’t approach that number, you may not be taking enough risk. “If FOMO creeps in, determine how much of your income you’re willing to invest and gradually enter the market to build confidence,” she suggests.

Conversely, if you often worry about a particular stock or sector collapsing, you might be overexposed to risk. “If the thought of a company failing sends you into a panic, it’s time to diversify, which inherently reduces your risk,” a financial planner advises.

Regardless of your current risk tolerance, staying informed is crucial for developing a healthy perspective as you evolve as an investor. “Educate yourself about your investments. If something isn’t clear, don’t invest in it,” he concludes.