You know that deciding to invest some of your money in the market automatically means you’re setting yourself up for possible loss.

But how much losing can you take? Does the thought of your stocks plunging make you sick to your stomach? Or are you a genuine thrill-seeker who loves the rush of adrenaline you get when you think about putting your money somewhere shaky?

Determining your risk tolerance is an important step to take for ensuring you’re completely comfortable with your investments. You might also come across trade recommendations that are discussing options based on different risk tolerances.

While your risk tolerance will change according to your age, income requirements and financial goals, there is no fixed label for those who fit certain criteria. There are simply too many variables. For example, most people think that the younger you are, the more of a risk-taker you’ll be. They reason that the years ahead afford you the freedom to take more chances with your money. While this may be true in general, it is not a fixed rule, and determining your risk tolerance depends on several variables besides age.

So, how do you determine your risk tolerance? Consider the following before answering the question:

Time frame

The first factor to determine is the actual length of the investment horizon. When will the funds be needed? Even a younger investor can have a short-term horizon if they’re trying to earn enough capital for a goal they hope to fulfill in the near future, such as buying a home. If the investment horizon is indeed short, the risk tolerance should shift toward being more conservative, regardless of the investor’s age. For long-term investments, there’s room for more aggressive investing.

If you’re an older investor, don’t fall into the trap of thinking that, just because you’re pushing 70, you need to move everything into conservative investments. This may be suitable advice for some, but it’s not recommended as a one-size-fits-all approach. For example, a retiree who has sufficient funds to live off the interest without touching the principal can safely invest in volatile stocks. Also, with today’s growing life expectancy, a 70-year-old investor may still have a 20-year investment horizon – or more! When determining your risk tolerance, be sure to consider your actual time horizon, irrespective of age.

Risk capital

An obvious factor of your risk tolerance is going to be how much money you have available to put into the market. What is your net worth? To find this number, simply add all your assets and subtract your liabilities. Risk capital is defined as the amount of money you have available to invest or trade that will not affect your lifestyle if it is fully lost. It is also referred to as liquid capital, meaning assets that can easily be converted to cash.

Naturally, an investor with a higher net worth will be able to take more risk. The smaller the percentage of your overall net worth the investment represents, the more aggressive the risk tolerance can be.

Unfortunately, those with little or even no net worth are often attracted to riskier investments because of the lure of quick and large profits. Bear in mind, though, that when too much risk is taken with too little capital, a trader can be forced out of a position too early to make the investment worth it.

On the other hand, if an undercapitalized trader using limited risk instruments “goes bust,” it shouldn’t take that trader long to recoup the losses. Contrast this with a high-net-worth trader who throws caution to the wind and puts everything into one risky stock and loses – it will take this trader a lot longer to recover.

Investment objectives

Your investment objectives are another important factor in determining your risk tolerance.

Are you saving toward a specific goal? Are you investing your child’s college fund with the hopes that it will grow? Are you trying to earn enough to support your retirement? If your goal is to raise enough capital for a pressing need, you will likely be more risk-averse. Or, you may be so desperate to raise those funds that you’ll make some hasty decisions.

On the other hand, if you’re simply trying to increase your net worth with extra capital, you’ll probably be more open to investing in riskier stocks.

Knowing your risk tolerance goes beyond being able to sleep at night without stressing over your investments. Ultimately, knowing your risk tolerance – and sticking to investments that fit within it – should keep you from complete financial ruin and allow you to invest with a clear head.

Do you love the thrill of the unknown or are you more risk-averse? How does this affect your financial decisions? Share your risk tolerance and reasons for it with us in the comments!

Published in Blog
Wednesday, 24 May 2017 09:13

Step #5: Learn The Costs Of Investing

You've learned to invest 15% of your household income into retirement. Now what? The ultimate goal of investing is to let your money work for you and provide you with stable, passive income.

But getting there is going to cost a pretty penny.

This month, take the time to learn the dollars and cents of investing. Of course, you knew that investing was going to mean coming up with the actual money you’re putting into the market, which always holds the possibility of being lost forever. But did you know there are going to be various fees, commissions, and taxes you’ll have to pay, too?

Let’s take a peek at an actual investment to illustrate this. The company and amounts have been changed, but they’ve been accurately scaled down to size.

Suppose that, on Aug. 13, 2015, a share of stock in Apple closed at $43.26. During the next few months, Apple issues four dividends of $0.55 per share. On Aug. 25. 2016, a share of stock in Apple closed at $51.23.

Let’s say you chose to invest $1,000 in Apple on Aug. 13, 2015 and you withdrew it on Aug. 25, 2016.

At the time of your investment, $1,000 would buy you 23.25 shares of Apple. Over the year, you would have received $51.16 in dividend payouts. When you withdrew from the company a bit over a year after your initial investment, you’d sell that stock for $1,191.09.

It seems like your gain from this stock is $242.25, broken down into $51.16 in dividends and another $191.09 from selling the stock. Simple, right?

The problem is, though, you haven’t exactly earned that much. Here’s where the costs of investments come into play.

First, the dividends would be subject to income tax. In this case, the dividends are considered qualified dividends, and would therefore be taxed at a rate of 15% by the federal government and possibly more by state and local sources. As a result, $7.67 of that dividend gain is eaten up by these taxes.

Second, you’re going to have to pay your broker for the cost of buying and selling the stock. Let’s say, hypothetically, you’ve used an online discount stock brokerage firm. The buy and the sell would each cost $9.99. That’s another $19.98 dropped from your gain – although this fee is tax deductible.

Third, the gain on the sale would be a long-term capital gain, so 15% of that gain goes to the federal government. Since your gain was $191.09, you’d be paying an additional $28.66 in taxes on the sale.

In total, your expenses for your gain add up to $56.31. Just like that, nearly 30% of your gain is gone!

Even if your investment is a loser, you’re still paying the brokerage fees and will earn less in dividends.

The moral of the story? Investing costs. You’re taxed if you gain, and you’ll get hit with brokerage fees whether you win or lose.

Some forms of investing have lower costs than others. If you invest directly with an investing house, you can bypass the investing fees and only pay the taxes on your gains. However, you’re limited to the offerings that the investing house has available, and you’ll be subject to their often inflexible minimums for investing.

You could also simply invest in a money market account or other savings option at Wasatch Peaks Credit Union. Your returns will come with fewer or no costs. Plus, your balance isn’t at risk. Yes, you might “lose” some gains by only having the cash in a savings account, but your money is earning a steady return. If you invest elsewhere, it’s possible that the costs, the fees and the taxes can easily eat up a substantial amount of whatever you gain or make an already painful loss even harder.

It’s important to note that the bigger your investment, the smaller the impact such costs have. At the $1,000 level, the investment fees in the above scenario typically eat up about 2% of your balance. If you’re investing $10,000, the fees will only eat up 0.2% of your balance, and if you invest $100,000, the fees eat up only 0.02% of your balance.

Thus, as a beginning investor, it’s crucial to know the total cost of ownership of an investment as you consider it. Even a small fee can significantly lower your total return when you’re starting out with small investments.

That’s why it’s best to take it slowly at first and continue learning about the market and stocks you’re interested in. Know exactly what you’re going to invest in – and what all of the costs of that investment are – before you put down any of your money. After working out the math, you may find you’d rather wait until you have a substantial amount saved up for investing, as these fees don’t make such a big dent when the gains are larger.

So, before you make that first investment, learn the costs and be sure it’s worth the price!

Did you get hit with any surprise costs on your first investment? Share your experience with us!

Published in Blog

Creature comforts like smartphone bank deposits are nice, but how much are they costing you? Your statement might not show the costs directly, but there’s an old adage about situations like this: If you’re not paying for a service, you’re not the customer. You’re the product. In this case, corporate banks use slick technological bells and whistles to get you in so you’ll be more likely to take out loans and use other for-pay services.

If you’re tired of being treated like a product, you’re not alone. Last year, 2 million people between the ages of 18 and 35 joined a credit union. 28% of credit union members are under 35 while 54% of them are under age 50. The tools of technology are making it easier to see the value that credit unions offer.

Don’t just take our word for it. Do your research and see for yourself how credit unions compare to for-profit banks. Consider these five categories:

1.) Ease of service

Here’s a fun game. Call a corporate bank with a simple request, like checking the balance of a savings account. Count the number of irritating phone tree menus you have to sift through before you could talk to a real person who could answer your question. You win when you get frustrated and slam the phone down in anger!

For-profit banks have earned a reputation for cumbersome customer service and out-of-touch policies. Getting information on financial services, like credit repair or auto loans, means sitting on hold for hours. Credit unions, on the other hand, provide easy-to-use services and real, live human beings who can answer questions, make recommendations and help you understand the complicated world of finance.

2.) Lending practices

For-profit banks answer to corporate owners. They expect a predictable, stable rate of return on their investments. This demand puts a straitjacket on lending and ensures those practices never deviate from a pre-determined formula. Take income, multiply by credit score, divide by 2, that’s the interest rate they’ll charge.

However, let’s pretend you just got a new job, so last year’s tax returns aren’t a good indicator of how much you are earning. That’s not in the formula, so it doesn’t matter. Credit history ruined by an old medical bill? Corporate banks stop reading after the first three words of that sentence. In short, there’s no room for flexibility and interest rates tend to be much higher.

Credit unions are community institutions, so helping people out is part of what we do. Our rates tend to be lower than those of corporate banks. We also tend to be more willing to make exceptions for details that may not be reflected in the conventional lending formula.

3.) Online banking is everywhere

In the wild west days of the Internet, only corporate banks could afford online banking. Now, your pet gerbil can have his own website. The Internet is everywhere and credit unions are on board. The services you use every day, like online bill pay, direct deposit and checking on account balances are just a click away. Follow this link to learn more about the mobile banking that Wasatch Peaks offers.

Most people don’t handle paper checks anymore, so banking from the computer or mobile device is all most consumers really need.

4.) Educational resources

Corporate banks have historically made a killing by keeping people in the dark about their practices. Credit card companies made it hard to tell exactly how much interest you were being charged. Banks charged overdraft fees without ever telling you they were doing it. These things got so bad, Congress took action. Consumer ignorance was built into the profit model of big financial institutions. Educating consumers was not just a waste of money to them, it was actually costing them business.

Credit unions are not-for-profits that want to make their communities a better place. Wasatch Peaks donates thousands of dollars and volunteer hours each year to our community. Part of the mission of making our community a better place includes financial education. If you need advice about home-buying, making a budget or using credit responsibly, Wasatch Peaks will be happy to help. We also have a blog called "Peaks Financial Fitness" that is published every Monday. It relates everyday topics to finances in a way that is applicable to almost all lives.

5.) Savings

Credit unions work for their members. We pay back the money they make to their members in the form of dividends. Since our members are also the people paying for their services, we don’t have much of an incentive to charge an arm and a leg in interest and fees.

Wasatch Peaks Credit Union offers competitive rates on savings accounts and CDs/certificates. Because we don’t have to siphon off money to pay shareholders, we can return that money to their investors: you know, the people who do their banking with the credit union. Compare the earned interest on a credit union checking or savings account to those offered by a for-profit bank. Then, go open an account at a credit union, like Wasatch Peaks. You’ll thank yourself later.

Published in Blog
Monday, 05 December 2016 09:39

Thinking about retirement at Christmastime

I am not ready for Christmas, so why am I thinking and writing about retirement? Our parents are both retired, and it came fast. I remember when my parents were my age. Even though it’s Christmastime, I’ve been thinking about retirement.

Over the years, I’ve tried every retirement calculator tool available. I’ve estimated my family’s expenses. We have met with financial planners. I have concluded that there are a lot of unknown factors about retirement and have accepted this.

When is retirement?

According to the Social Security website, currently full retirement age is 67, which is close to the age of our parents. I’m fascinated with young retirees I’ve heard about. Retirement doesn’t have to mean “age 67.” I understand it to mean the time when we are not actively earning money and living off passive or saved income. This could be any age.

What kinds of income will you have?

My husband plans to work as long as he physically can. He loves to work so he will probably work during retirement, but it will be a different kind of work. He worked construction for his first job, which was very physical. His current production job requires physical labor, but not at much as construction required. I assume that he will do less physical labor but still work as much as he does now.

During retirement, some passive income will come from investments that you made earlier. So, we need to decide what type of investments we will make.

What kinds of expenses will you have? The best way I know to estimate retirement expenses and income is to look at those who are retired. My parents and inlaws have these expenses:

  • Travel
  • Transportation
  • Housing
  • Insurance
  • Utilities
  • Medical expenses
  • Donations
  • Gifts
  • Food
  • Hobbies

I realized that our parent's expenses are pretty similar to ours but the amounts are different. These amounts can range from a little to a lot, which is why it’s important to think about your personal plans.

Wasatch Peaks Retirement Calculator

This Wasatch Peaks Retirement Calculator was a great tool to use after I figured out what I think our expenses will be. The calculator said our investments need to be $300,000 to $400,000. This number depends on interest rates. Also, I didn’t calculate in social security benefits. So, it might not be an accurate number, but that is ok. Just figuring an estimate helps our family prioritize saving now. We are relatively young and there are a lot of urgent expenses we have in raising our family like clothes, braces, and Christmas to name a few. Retirement savings can easily be put on the back burner, which I have done plenty of times. Knowing this number helps me prioritize saving now in order to build to the necessary nest egg we need for the time when we don’t actively work and earn money.

A financial planner once told me that planning for retirement at my age will open up options. I want you to have a lot of options in retirement. Please join me in spending a few minutes planning for retirement.

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