October 26, 2023

JF3339: How to Identify Your Risk Tolerance | Passive Investor Tips ft. Travis Watts




Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

In this episode, Travis offers guidance on how to identify your risk tolerance when it comes to investing so that you can select the right deals that align with your goals. He also shares insights into risk premiums and how to determine what your investing strategy should be depending on your current financial situation.

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Travis Watts:
Starting with your goal. Are you trying to preserve the capital that you have and modestly grow it over time or just kind of keep pace with inflation, or are you aggressively trying to grow your net worth and your nest egg? That's going to determine the types of deals you wanna look for.

Welcome to the best ever show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.

Hey Best Ever listeners, welcome to another episode of the Best Real Estate Investing Advice Ever Show. Travis Watts is back today with another edition of Passive Investor Tips, but first I want to let you know that today's show is brought to you by Presario Ventures, a private equity real estate firm based in the booming Austin, Texas market. To learn more about how you can invest in the future of Texas with Presario Ventures, visit info.presarioventures.com forward slash best ever or click the link in the show notes. Now, I'm going to kick it over to Travis for another episode of Passive Investor Tips. 

Travis Watts:
Welcome back, best ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode, what we're talking about is understanding risk premium and what you need to know. Disclaimers is always never financial advice, not telling you or anyone what to do with your money. Please always seek licensed financial advice when it comes to your own investing. Now, with that top of mind.

Risk premium in a nutshell, consolidated down, is just the additional premium that an investor requires for taking on additional risk. So as an investor, we start by thinking about what is the safe money? Okay, and safe money would be maybe buying a US Treasury bond with a 4% yield, or maybe making a 4% yield in a high-yield savings account that's FDIC insured, it doesn't mean that there's no risk in these investments because every type of investing entails some level of risk. But generally speaking, these are considered safer than most investments. So we'll use 4% as our benchmark to paint this example. So let's say you're looking at some investments and you're looking at a real estate deal that's projected to return about 8% a year or maybe a high yield dividend paying company, a stock for that matter, paying their investors 7% yield. So essentially that three to 4% in additional yield is the risk premium for taking on the additional risk instead of staying in the safe money. And when you measure risk, there's a lot of things you can look at. A few would be the default risk, the liquidity risk, the price fluctuation risk, to name a few.

As the saying goes, higher risk, higher reward, but what's really important is to understand what your risk tolerance is and what you're comfortable with. So I wanna share a quick story with you. A couple of years ago in my brokerage account, there was a company stock publicly traded that had fallen about 50% from its all-time highs. And I decided at that moment, I was gonna take a position in hopes that maybe that stock could recover and I could essentially double my money from my entry point, right? Well, unfortunately, that stock just kept falling and I ended up with about a 35 to 40% loss from when I first entered that trade. And the takeaway there was it should have told me something if I could potentially double my money in a short amount of time, the level of risk that type of investment might entail, remembering higher risk, higher return. So let's talk about you.

Maybe you have $100,000 to invest, let's say in this example. So number one, I would recommend starting with your goal. Are you trying to preserve the capital that you have and modestly grow it over time or just kind of keep pace with inflation? Or are you aggressively trying to grow your net worth and your nest egg? That's going to determine the types of deals you wanna look for, which is step number two that align with your goals. For example, a US Treasury bond or high yield savings account would be more in alignment with someone trying to preserve their capital, where they do not want to risk it, they do not want to lose money. On the flip side of that, for someone looking to grow their net worth or be more aggressive, they might consider more speculative investments, maybe venture startups, maybe flipping houses, there's a multitude of things, but again, keeping in mind higher risk, higher return.

And number three is to consider the outcomes. For example, are you comfortable growing your $100,000 at a rate of 4% annualized? And on the flip side, are you comfortable with losing money? What if you put your 100 gram into a startup and it went to zero? What if you lost 50% in a speculative stock? This is going to help you identify what your risk tolerance is.

So in conclusion, there is no right or wrong way to approach investing. It's really about your goals and objectives and what it is you're trying to achieve. So I'll leave you with a couple practical examples to take away from this episode. Let's say that Bob was a business owner, he just sold his company, and he now has $10 million to invest. Well, that 4% example might make a lot of sense for Bob if he wants to go put it into a US Treasury bond or a high yield savings account or a CD at the bank or something like that, because $10 million at 4%, $400,000 per year. So for him, that may be a suitable investment. On the flip side, if we consider, let's say a 20 year old who's just getting started with investing and they only have $10,000 to invest, they may be wanting to take more risks. They may be looking more into the speculative investments so that they can aggressively grow their net worth and grow their portfolios. The question is, what's right for you? What's your next move? You're listening to Passive Investor Tips. I'm your host, Travis Watts. Appreciate you as always for being here. Like, share, subscribe, comment. Share these episodes with anyone you think could find value. And until the next episode.

Have a best ever week everyone. 

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