Understand your risk tolerance before investing

December 13, 2022 by Nancy Crowe

To make your own or your church’s financial resources work for you, first understand the why, what and when of any potential investment, said Anita Clemons, Senior Vice President of Investment Management for the Presbyterian Foundation.

Anita Clemons

Her presentation, “Know Your Fund Types,” was part of the Foundation’s Day of Learning Nov. 8. During her presentation, Clemons discussed how different types of investments function and important factors to consider.

To begin, define your goals and time-frame for your investment and its returns, she said.

And understand your risk tolerance, both financial and emotional.

“It should be boring,” Clemons said with a smile.

Mutual funds and more

About 44% of U.S. households own mutual funds, mostly with the goal of retirement savings. People invest in mutual funds to earn returns higher than that of certificates of deposit, savings bonds or Treasury bills.

In general, Clemons said, mutual funds are best used for time-frames of more than three years, preferably more than 10. You typically only need $1,000 to get started. Mutual funds are professionally managed and they have some liquidity.

Most mutual funds provide greater return over time than investments with guaranteed returns, but you can lose money. Due to market risk, you can lose some or all of what you invested (known as the principal). This taps into desire for quick gain, fear of loss and more. That’s why it’s important to decide, going in, what you’re willing to lose in value or principal.

With that in mind, diversify your portfolio, Clemons urged. A single mutual fund can invest in hundreds of stocks or bonds, but you should still spread the risk across, say, stock funds, bond funds and money market funds. Also be aware of the costs associated with buying and selling mutual funds: front load, back load, no load or load waived and expense ratio.

Clemons said a fund’s past performance is no guarantee of future returns. She suggested checking the fund manager’s tenure. If a fund has performed well for five years but the manager has only been working with it for one year, be cautious.

Another type of fund is the exchange-traded fund (ETF). Mutual funds have been around since 1924, but this relative newcomer launched in 1993. Both consist of a mix of assets, but the difference is in the way they’re traded. ETFs can be traded intra-day like stocks. Mutual funds can only be purchased at the end of each trading day based on the net asset value.

Types of mutual funds and ETFs include large-cap funds, small-cap funds, value (“I call them ‘on sale,’” Clemons said) funds, growth funds, income funds, bond funds, asset allocation funds, target-date funds and money market funds.

Clemons added that low-risk money market funds, which generate income but little capital appreciation, have been a great “parking place” in 2022.

The most important decision is asset allocation, she said. Diversification reduces risk because market conditions that favor one fund class may negatively affect another. Stay focused on long-term growth.

Investing for Good

Clemons noted that socially responsible investing can happen with any type of fund. Moreover, ESG (environmental, social and governance) factors have been proven to positively affect a company’s bottom line. They may also lead to better portfolio returns.

The Foundation’s approach to faith-based investing uses three pillars:

  • Screening: Selecting investments based on Presbyterian values;
  • Shareholder advocacy: Investors having a voice in socially responsible practices and procedures;
  • Community investments: Creating positive change in communities and the world.

To learn more, contact your Ministry Relations Officer.

Nancy Crowe is a writer, editor, and animal wellness practitioner based in Fort Wayne, Indiana. She is a graduate of Louisville Presbyterian Theological Seminary. Send comments on this article to Robyn Davis Sekula, Vice President of Communications and Marketing at the Presbyterian Foundation, at robyn.sekula@presbyterianfoundation.org.