Posted by Ryan on May 16th, 2008 in Tools and Calculators

Risk measurement calculators can be a fantastic tool. You take a quick survey that makes you reflect on how you would feel or react to certain market conditions, and the risk measurement genie tells you exactly how to invest your money.

But risk measurement calculators are only a great tool, if only they produced realistic results.

The problem with risk tolerance calculators is the output is determined by how you think you would respond to a certain scenario. Turns out that how you think you would act is different than you really do when actually in that situation.

For example, “What would you do if your portfolio dropped 20% in value in a single day? Would you take your money out of the market, invest more, or not do anything?”

You might think that’s an easy question . . . you should invest more while stocks are cheap. That may be the appropriate move, but when the time comes and your money is actually at stake, making the sensible decision is not always easy. You might start thinking, “What if the market drops another 20% after I reinvest?”

When your emotions are involved, it’s an entirely different game. That’s why brokerage firms love it when you use their free stock trading simulator. When you use simulations that provide you with fake money to trade, studies show that people have better investment performance then when they use their actually money. Why? Because when you use the simulator, there is no subconscious emotional interference with your decisions.

Millionaire Money Habit: When using investment risk measurement calculators, use the results to guide your investment decisions, but don’t let them be an end-all-be-all answer to all your investment needs. -RT

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Posted by Ryan on May 14th, 2008 in Money Management

Personal finance planning can seem complicated and difficult. With so many investment products and vehicles, budgeting tools, debt pay down strategies, savings plans, and personal finance jargon, it can be tough to weed through all of the information and figure out where to start.

Here’s a quick checklist to make sure you are on the right path:

1. Create a Budget: The first thing you need to do is asses your income, expenses and create spending limits to live within your means.
2. Pay Down Debt: The more interest you are paying on loans and credit card bills, the harder it is and the longer it will take you to accumulate wealth.
3. Build an Emergency Fund: An emergency fund will protect you for inevitable events that would otherwise drive you deeper in to debt. Be prepared for the unexpected and you will avoid one circumstance ruining your ability to become rich. (see Why is an Emergency Fund Important?)
4. Invest Automatically: While investing can be complicated and daunting, it doesn’t need to be. The reality is that the simpler you keep it, the better returns you will receive. Simply invest in diversified mutual funds, index funds, or a life-cycle fund through your 401k plan and you will keep risk low while earning market returns.
5. Stay on Task: As many of the celebrity investors, such as Warren Buffett and Ben Stein, frequently state, you want to be a long term investor in order to take advantage of the The Power of Compound Interest.
6. Increase Your Income: As your income increases over time and you earn raises, promotions and uncover new ways to bring in additional income sources, put more money to work for you.
7. Make Personal Finance Planning Fun: Believe it or not, personal finance can be fun. Make it a challenge to save a certain amount of money, stay within a budget, and find ways to cut your costs. Set short and long terms goals and remember to reward yourself for reaching your goals.

None of these personal finance planning tips here is particularly mind blowing information, but it can be life changing. The important thing to realize is that personal finance does not need to be difficult. Anyone can build wealth with a little discipline and consistency.

Millionaire Money Habit: All self-made millionaires started somewhere. It will take time and a little preparation, but you can reach your financial goals by creating a Millionaire Mindset. -RT

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Posted by Ryan on May 12th, 2008 in Investment Strategy

What is it that gets you excited about investing? Is it the opportunity to make a quick buck, the thought of taking advantage of compound interest in order to retire rich, or maybe the feeling of owning part of a great American company?

Unfortunately, often people get excited about investing their money by the dreaming big. They see companies like Hansen and Google that have created millionaires and their friends talk about amazing profits during cocktail parties. The next day the dreamer jumps in, only to find the party is over and the investment was a poor decision.

I know I’m guilty of getting excited about the potential of huge profits. It’s fun to stop and think, “what if . . .” But it is important to control that emotion and make sure you are not making money decisions based on hope. Investment decisions should be based on the likelihood of winning.

How do you avoid losing and chasing hope? Instead of asking yourself, “how much can I make off this investment?” take the time to consider how much is at stake. What is the potential that could actually be lost in the investment? What is the probability that the stock could go down, the real estate investment not sell or the company go bankrupt? These are the magic questions.

The key to investing is not how much you make, it’s how much you can minimize your loses. In a diversified portfolio you will have some big gainers, some that are slow and steady winners, and a few losers. In a diversified portfolio it is a given that your winners will perform better than your losers over time, so the focus should be on reducing your downside. By doing so, you will be making investment decisions with lots of upside potential, which will naturally accelerate your profits.

When you ask yourself “how much can I lose,” it forces you to really analyze what you are getting into. If you do your homework and answer correctly, you’ll find the opportunities with little downside risk and great profit potential.

Millionaire Money Habit: Don’t let hope cloud your investment decisions. Take the time to remove the emotion by asking what you could lose before diving into something that only makes you see the profit potential. -RT

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