Risk is like a coin with two sides. Any time you plan for your future, the opportunities present both risks and rewards. While you certainly don’t want to flip a coin and bet on your financial future, you get the point because risk isn't a flip of a coin, but rather an informed decision. When you’re taking an important step with your finances, these risk/reward scenarios are almost always contemplated and analyzed in advance. Other times, we just scan through the scenarios in our mind and don’t take the time to really evaluate the consequences we may face. That’s fine too! After all, we can’t spend our whole life thinking of the ups and downs of every choice we make! But, when the stakes are high, it is imperative that we engage in a structured process.
If you have invested in the market before, you know the more risk you take the more you amplify the results, whether positive or negative. So, your attitude toward risk – your threshold and tolerance – can determine your level of comfort with an investment. The big risk that we all think about is loss of principal, but that’s just one of the many forms. Other risks may relate to interest rates, business strategy, or the regulatory environment. Here at EquiFi, we believe that each consumer will have a different approach, but that for all of us one rule applies: we want to maximize opportunities and minimize risks.
Our home presents a risk called diversification risk. How can we manage it? I’m glad you asked! For a number of reasons, mainly emotional, we get very attached to our home and at times have difficulty seeing it from a mere financial standpoint. The home is an asset, a very valuable one; like any other assets, it should be looked at as a source of growth and expansion. In most cases, the home leads the way toward wealth creation and helps you achieve the goals that matter to you. If you, like most homeowners, have come to the realization that the vast majority of your wealth is in your home, it may be time to re-evaluate your diversification risk by looking at the asset allocation comprising your wealth.
If someone told you to put all your eggs in one basket, would you say that’s smart advice? Would you follow such opinion? Probably and hopefully not! So, why is that OK to have all of most of your wealth concentrated under your roof? It is not! You could use some of that wealth working outside of the home, maybe in the market, maybe in another investment property, maybe to supplement your 401K, and so on. There are many paths that can lead you to balance and prosperity. Finally, if ever in the future, the economy experiences a downturn, similar to the one in 2008, what will that mean to your property and financial situation? We certainly do not wish this scenario on anyone but are compelled to tell you that having a co-investment from an outside investor may make quite the difference under those circumstances. Think in advance, hedge your risks and look at your home for the beautiful place that it is, and for the source of wealth it should be. Thanks for reading! See you next time.