5 Investment Risks: Is Risk a Necessary Factor of Return?

Those of you who live in Arizona know that October is usually the month that the temperatures start decreasing and people are excited to be outside. I am one of those people. I live in Arizona for the opportunity to hike, bike and just enjoy the beautiful southwest outdoors.

Over the years, I have come to recognize the benefits, but also the hazards, associated with the different types of outdoor activities — and of simply being outdoors. Some of those benefits include: healthy workout, vitamin D, access to beautiful views.

In turn, some hazards associated with those benefits include: spraining an ankle while hiking, sunburn, running out of water. Knowing my desired outcome I am able to gauge my capacity for risk, and plan accordingly.

Risk and investment returns

This is also true with investments. One can get higher returns if they are willing to assume more risk and equally true, the lower their risk, the less they are expected to receive in returns. Historical data shows us that investors are compensated in proportion to the risk they take.

This research identifies five risk factors that explain most of the expected returns associated with different asset classes.

These asset classes are:

I. Stocks

  • Large Capitalization Companies: Growth/Blend/Value
  • Medium Capitalization Companies: Growth/Blend/Value
  • Small Capitalization Companies: Growth/Blend/Value

To differentiate and define risk within each stock asset class below are three factors:

        A. Market Risk —generally, stocks have higher expected returns than fixed income securities

       B. Size Risk—small capitalization stocks have higher expected returns than large company stocks

       C. Value/Growth Risk—lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks

II. Bonds

  • Long-Term (generally greater than 10 years): High to Low Credit Quality
  • Intermediate-Term (generally 4 to 10 years): High to Low Credit Quality
  • Short-Term (generally 1 to 3 years): High to Low Credit Quality

And then below reflect compensated risk in the bond market:

         A. Maturity Risk—longer-term bonds are riskier than shorter-term instruments

         B. Credit Risk—instruments of lower credit quality are riskier than instruments of higher credit quality

Assessing risk when making investment decisions

Just like we recognize the benefits and hazards associated with the outdoor activities we enjoy (risk/reward concept), we must also go through a similar process with investments. This risk/return concept is one of the essential components when making investment decisions and assessing a portfolio. My next blog, Managing Risk, will address the idea of managing and capitalizing on one’s exposure to risk factors.

2 Key Questions to Answer: Understanding Your Risk Tolerance and Time Horizon

With my birthday on the horizon I’ve been thinking about what I’ve done throughout my life and what I’d still like to do. It’s interesting to look at those two lists and compare. Perhaps you’ve done this exercise. When reviewing these lists, I see a clear change in my personal risk tolerance over the years.

Risk assessment is something we all do every day of our lives. And regarding our investments, it’s definitely something we should be doing and reviewing at least annually. It is important to know that with each risk there is a certain return associated. Identifying early which risks one is willing to take, given the related return, can reduce a great deal of heartache in the future. There are numerous questionnaires available to help identify your risk profile. I use two such questionnaires which can be found at http://maximawealth.com/resources/resources/.

When assessing risk and identifying your risk tolerance there are few key questions to ask and answer.

1. Can you handle short-term losses?

The answer to this question is going to be different for everyone, and may even be different for you, depending on your individual goals. An investment policy statement (IPS) can help you maneuver through the ups and downs of the market, as well as address matters such as long-term goals and desired returns. I assist each of my clients in establishing an IPS after we define goals and objectives and clarify their current financial situation.

2. What fundamental factors can influence your risk tolerance?

It probably wouldn’t surprise you to learn that age is an important consideration; however, the second one might be a foreign concept – time horizon.

Risk and time
As we age, the amount of time we have to make up our losses is reduced. These losses could be in the way of money, time or even broken bones. This is why as I compared my two lists I wrote about earlier I recognize my desire to skydive when I was younger has now turned into specifying my desire to indoor skydive. So, it makes sense if one might gradually reduce the amount of risk in their investment portfolio over time just like one might adjust the different recreational activities as they age.

But what exactly is meant by time horizon. Basically, it is your timeline to the specific goal in which you are investing, such as retirement. This timeline can influence your risk tolerance. Identifying the desired time horizon is very important when it comes to choosing investments and your overall asset allocation for a particular portfolio.

With longer-term goals we can often afford to be more aggressive than with shorter-term goals. Take my skydive example above. If I were to skydive now and break my leg on the landing my recovery would likely be longer because of my age, whereas if it had happened when I was a young adult my bones and body could recover quickly.

“The torment of precautions often exceeds the dangers to be avoided.” – Napoleon Bonaparte

There is a relationship between risk and return. Risk is a necessary factor of return. Investors need to recognize this risk/return trade-off. Understanding this will lead one to recognize the importance for investors to manage risk even more than simply trying to reduce it. And this begins with understanding your risk tolerance and time horizon. Check in for my next blog discussing the risk/reward concept.

Organize, Plan, and Get on a Consistent Schedule with a Family Budget

Are you ruled by the academic school calendar? Do you live by the football calendar? Maybe you begin planning your next year’s budget when the Pumpkin Spice Latte is back on the menu.

Whatever it is that motivates you to organize, plan, and get on a consistent schedule, I want to challenge you to include creating a BUDGET. Understanding where your money is going and where you would like it to go in the future is the beginning of empowering you and your money.

Following a budget helps you proactively save, spend, and grow your money. Most people don’t have a clear understanding of their monthly spending habits and may actually feel they are spending too much. Some are pleasantly surprised to find that they have more money in their budget allowing for increased savings. So, the first task I ask my new clients is to spend the time to create their budget.

Two things happen when clients create a budget:

1.First, most people find areas in which they are overspending and immediately make adjustments resulting in savings.

2.Second, they have more clarity about their financial situation.

Sometimes during this process I see the “deer in the headlights” look and the “stop” statement: “I don’t know how to create a budget.” Your budget does not have to be perfect and it does not have to track every penny. The best plan is the one you will stick to on a consistent basis.

Budget tools

With today’s technology, there are a number of budgeting tools that can help automate the process. Your bank or credit union usually offers a budget tracker and of course I offer a simple Monthly Budget spreadsheet that can easily be adjusted to meet your needs. I even support the old school pen and paper method as long as it works for you. Whatever you use, the important point is that you DO IT.

Yes, creating a budget may require some work and effort, but the benefits can have long-term life-enhancing effects. A few of those benefits are:

  • Control over your money
  • Focus on your financial goals and objectives
  • Awareness of where your money is spent
  • Organization of your spending, saving and investing
  • Proactive investment, spending decisions
  • Plan for unexpected costs

Keep in mind a budget won’t really save you from bad spending habits. But, it will give you a goal and plan to keep you focused. Financial knowledge is not about prevention, but instead about empowerment. The more you understand your personal finances, the more opportunity you have to make smart and effective money decisions.

The Evolution

Welcome to the final installment, blog #3 in the Maxima Wealth Management rebranding.

With everything in place to officially launch my new identity, I wanted to review the final outcome along with the process I took to get there. This step is actually referred to as The Review and is the final step in the financial planning process. At Maxima Wealth Management, I believe that planning is the cornerstone of financial success, so it should not be a surprise that The Quest and The Identity are an illustration of the “5-Steps to Planning” — a strategy I have found useful whether for personal use or for wealth management.

Assess the Situation

The first step to this five-step approach is assessing the situation. In my first blog, The Quest, I did some informal and formal assessments. Part of the assessment was recognizing I needed to re-ignite my passion for my profession. This assessment led me to the analysis and clarification of my short and long-term goals. This step is very important in the financial planning process and one that we would accomplish before anything else.

Develop a Plan

For the second step, I worked at developing the plan to meet my goals. I have found that realizing my goals, whether they are personal or professional, is a much more successful process when I have a plan. When you decide to develop a financial plan it’s important to take into account several considerations.

The first is to address any obstacles standing in the way of you and your financial goals.

The second consideration is to determine the tools available to help overcome and avoid the obstacles.

Finally, it’s important to make sure that your plan is workable and makes sense. It will do you absolutely no good to develop a plan if you cannot follow it. This is where professional assistance is necessary.

I was able to identify and overcome my obstacles through the utilization and implementation of a personal self-assessment tool. This process required me to assess my strengths, clarify what is most important to me and then define my Ideal Client. As I discussed in The Quest, this process became one of the most important aspects to my plan.

Choose Planning Tools

The third step required me to decide on the tools to use that could help me achieve the desired results. As with most tools – the user needs to know how to properly use the tool before it can be of use to them.

For my purpose, I chose tools that would illustrate my level of commitment to my clients, which include my original Client Service Experience and a newly developed client-friendly website. Just as a hammer is meant to drive a nail and is not intended to cut through wood, certain tools have specific uses.

At Maxima Wealth Management, using a holistic approach to planning, we look at your entire financial picture and recommend tools that will integrate well with the rest of your plan to create synergy. We take the view that a proper financial plan will utilize the most appropriate tools available and that there is no such thing as “one-size-fits-all” in the financial world.

Implement a Structure

Implementation is the fourth step in the planning process. With the website complete and a client agreement in place my quest was nearing the final stage.

Just as a hammer will never drive a nail into wood unless somebody picks it up and swings it, your tools and your plans will do you no good unless you use them. To help facilitate the use of the financial tools, Maxima Wealth Management has developed, and makes available to our clients, resource materials designed to help educate our clients so that they can properly use the structures and tools created.

Review the Structure

I see my quest as an ongoing way of life, much like I see the requirement of a regular review of your financial plan. Once you have developed and implemented a plan, it is important to review the plan periodically as required by the fifth and final step. It makes good sense to review your plan and to reassess your situation at least on an annual basis.

Remember, if a ship leaves port and is off by one degree when it departs and the crew does not catch the mistake for a week, they will be many miles off course when they do discover that they made a mistake. A periodic review allows you to get back on course if things change or new obstacles arise.

Ongoing Journey

I encourage you to come in and go through this five-step approach whether it’s for you, your family or your business. It’s never too late to take The Quest and make sure your financial plan is in place and leading you to the financial future you envision.

Please take some time and peruse my new website, http://maximawealth.com/. Make sure you continue to check back for upcoming blogs!

Open House

“It takes just a moment to change your attitude. And, in that quick moment, you can change your entire day.” – – Author Unknown

Please join me for Maxima Wealth Management’s:

Positive Thinking Open House

Positive Thinking Day is September 13, 2017. This day is all about a positive attitude and my celebration of The Quest, my firm’s rebranding and recommitment to my clients. You are an important part of my business, and my success. Please allow me to express my gratitude by treating you to beverages, hors d’oeuvres, and a fun social gathering.

The power of positive thinking is awesome. Medical research confirms that a positive attitude can work wonders at fighting disease and illnesses, from the common cold to cancer. People with a positive attitude such as “I think I can” or “I can do this!” are more likely to succeed at work and accomplish more goals that they’ve set in life.

Please join me:

When: Wednesday the 13th of September

Time: Starting at 6:00 to 8:00 p.m.

Where: 60 E. Rio Salado Parkway, Ste 900

Tempe, Arizona 85281

Please feel free to bring a friend.  I look forward to seeing you there!

The Identity

Welcome to blog #2 in the Maxima Wealth Management rebranding quest.

In order to move forward with my company rebranding, I realized I must embark on a set of actions, and taking action involves a number of steps. I developed my goals and had a clear idea of who my ideal client was. This information would guide me in meeting my mission and realizing my vision. During this process I developed a tool: the Client Service Experience; this would continue to guide me throughout my quest.

Next came the concept of creating an identity for my company. I started this quest in an effort to renew my passion for why I became an independent financial advisor. It made sense that rebranding was a necessary step. I realized my previous brand no longer reflected me or my company. It was my desire to create an identity that was a reflection of me, personally and professionally, as well as a statement of my promise to my clients and my company’s values. My identity would include the visual elements of a company name, its logo and colors.

A Name With Meaning

I started by wanting to personalize the name of the company. Yes, I wanted it to speak to my clients, but I also wanted it to speak to me. I reached deep down inside and realized I wanted the name to illustrate my legacy. A big part of one’s legacy is one’s surname, mine being Wagner. But it also includes intangible gifts left by those who are no longer with us; such as, experiences, memories and character.

You may not know this, but my mother passed away when I was a teenager. I learned a lot through this experience and it played into my overall development. I wanted to take this opportunity to honor that legacy, to honor my mom. Her name was Maxine, so I set out to incorporate her name into the legacy I was creating. The ancient Roman form of Maxine is Maxima and it means the greatest. This was the perfect start of creating my new identity.

I knew I wanted the name to be descriptive of what I did. As I brainstormed the variety of possible descriptive company names, I chose Wealth Management. To me, the word wealth speaks to abundance and prosperity and many times refers to material goods. It was my intent to choose words that illustrate both physical and abstract ideas.

So, the new name of my company was decided: Maxima Wealth Management. And it actually rolled right off my tongue.

Colors, Symbols, and Meaning

The next task was to select my colors and assist my graphic artist in designing a logo. I knew I wanted to incorporate a graphic that represented Arizona desert mountains, not only because I live in Arizona but also because I love the desert and hiking.

Every morning I’m fortunate to look toward the Four Peaks just east of Phoenix. The Four Peaks symbolize for me the opportunity we all have to reach our goals and realize our purpose. Additionally, I wanted to incorporate the colors, burnt orange and navy blue. Burnt orange reminds me of the Arizona desert as well as a visual representing energy. And, navy blue has always been a color of calm and strength to me. I was very pleased when my graphic artist designed the logo now depicting Maxima Wealth Management.

Ongoing Journey

Having my Mission, Vision, Ideal Client, Client Service Experience and a company Identity in place, I was now able to put it all together and display it for client viewing. I was ready to continue my quest towards a more relationship-based profession, one that is more satisfying to me and to my clients. Please take some time and peruse my new website, http://maximawealth.com. Make sure you check back in for blog #3 of The Quest!

The Quest

Welcome to the Maxima Wealth Management Blog!

A year ago, I embarked upon a quest to renew my passion for why I became an independent financial advisor. Without realizing it, the profession I loved had become transactional versus relational. My passion was to develop more meaningful relationships with my clients; I wanted to partner with my clients as they achieve their financial and life goals.

This process has been challenging and forced me to recognize and confront my weaknesses. I recognized that I needed something more and sought out a coach, someone who could guide me through this quest. My coach required a commitment from me, and I agreed to take the necessary steps to ensure a positive coaching relationship.

Business and Life Vision

My first challenge was to develop short and long-term goals. I was asked to think sincerely about what I wanted in my personal and professional life. It was through this step that I formalized my mission statement: “build lasting partnerships with clients and be their trusted advisor for all aspects of their financial lives.” I knew I wanted to focus more on educating my clients so they could take an active role in developing, implementing, and managing their financial future.

The next step involved the utilization and implementation of a self-assessment tool. This particular tool helped assess my strengths and clarify what is most important to me. This became the foundation for the success of my quest.
Through this tool I learned that my top five strengths are:

1. Judgement, critical thinking, and open-mindedness (key strengths in being a capable financial advisor)
2. Capacity to love and be loved (ability to have deeper relationships with clients, family, and friends)
3. Fairness, equity, and justice (practicing ethical behavior and doing what’s right)
4. Self-control and self-regulation (capability to be self-disciplined)
5. Caution, prudence, and discretion (ability to make sensible decisions)

I share these with you to provide awareness and understanding as I reintroduce myself and Maxima Wealth Management to you. Having a clear understanding of my strengths offered me the opportunity to re-examine some of my personal assumptions, thereby redefining and/or clarifying my goals and objectives with more specificity. This process actually strengthened my confidence in my goals and objectives, as well as my passion as a financial advisor.

It was at this time that I was ready to TAKE ACTION!

Begin With the End in Mind

I started this process by describing my Ideal Client. This is a description of the person who would choose Michelle Lee Wagner as their financial advisor as well as the person Michelle Lee Wagner would choose as a client. Specifically, the type of person who would choose Michelle Lee Wagner is someone interested in a financial advisor who is client-focused, independent, experienced, and committed to active communication. This person desires customized strategies built to meet their individual financial goals.

The type of client Michelle Lee Wagner wants is someone committed to improving their quality of life, who is willing to take advice and then take action, who values professional input, and who is dedicated to being engaged in the financial planning process. Defining my Ideal Client became identifying one of my most important goals, the goal that guides other goals and objectives.

Level of Commitment to Our Clients

Now that I knew exactly who my Ideal Client was, I proceeded to author my original Client Service Agreement. This Client Service Agreement illustrates the commitment I made to myself on behalf of my current and future clients. It details the frequency of communication and level of service my clients would experience in their work with me.

I am excited to continue sharing with you my personal quest of renewing my passion as an independent financial advisor, ensuring a more relationship-based profession. Please take a look at the following Ideal Client and Client Service Experience and then check back in for chapter two of The Quest!