🤨 How to Find your Risk Tolerance

Yes. This is the City Chad, the man whose investment portfolio is so diverse, it should have it’s own Netflix show. Let’s start diversifying our thinking!

In this week’s edition:

• Markets: 🥴 Not the Best Start to the Year

• Article:🤨 How to Find your Risk Tolerance

• News: 🇺🇸 US Economy may dodge Recession in 2024

• Chad Of The Week: 🕵️ Agent Juan Pujol

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MARKETS: 🥴 NOT THE BEST START TO THE YEAR

Ouch. Our portfolio bled on all fronts this past week.

The Nasdaq index received a big punch in two of its biggest constituents: Apple and NVIDIA.

Barclays downgraded Apple after weak iPhone sales. And the Dutch government blocked ASML Holding of shipping to China. This hurt NVIDIA and other semiconductor related companies, such as AMD and OnSemi.

On the flip side, biggest gainers were oil giant Chevron, powered by rising oil prices. Disney and pharmaceutical companies also did well.

However, most stocks suffered losses. Some speculate this is because, although the FED is showing signs of wanting to cut rates, it has not been clear on neither when nor how it will happen.

The Crypto market was a bloodbath, but who’s to blame for it?

Well, we aren’t someone to point fingers, but crypto-services platform Matrixport seems to be the one to blame. They published a market forecast report saying that the SEC won’t be approving any Bitcoin ETFs anytime soon.

Others say it is because Jim Cramer was bullish on Bitcoin. The internet joke is that with anything he says you should do the opposite.

It is so painfully accurate!

Not the best start to the year. But worry not, we’re just getting started.

ARTICLE: 🤨 HOW TO FIND YOUR RISK TOLERANCE

TLDR: Assessing your risk tolerance in financial planning goes beyond just your gut feel. Taking a more rational and intentional approach makes a lot more sense. Factors like age, commitments, and personal preferences all play a role. Be honest about stress tolerance and evaluate worst-case scenarios. Also weigh alternatives to determine a level that aligns with your comfort and goals. You’ll thank yourself later!

• ☣️​ To Risk or Not to Risk

• 🤗​ Your own Attitude

• 📈 More on Risk Premium

• 😎 The Chad Takeaway

☣️​ To Risk or Not to Risk

No extreme is ever good.

But we sometimes act like investing is either “YOLO and bet the farm” or “do nothing and put money under the mattress”.

Taking extreme risks may sound like the stuff of Hollywood movies. The Chad who “risked it all” to start their business or go all-in on a stock.

But despite this romantic take, jumping heard first into a Hail Mary bet isn’t really the best way to build long-term wealth.

On the other hand, a completely conservative portfolio with zero tolerance to risk might not be the best option either.

So, what’s the correct answer?

Despite what anyone else might tell you, ultimately it is completely up to you to decide your level of risk. Some people may have a better taste and appetite for risk. Some may have a more cautious approach.

The catch is that the correct answer is different for every person. And that’s completely fine, as long as you find your own balance.

The art and science comes from understanding where risk comes from and making an informed and rational decision that aligns with your goals.

In addition to this “gut feel” there are a number of factors you have to take into consideration to make this informed decision.

This includes your age, your commitments and personal preferences.

🤗​ Your own Attitude

Whether to indulge or not into risk depends on several factors that you should consider.

• Age: The unstoppable track of time is one that you should definitely consider. What's your stage in life, family, and career. The obvious conclusion is that the younger you are, the more likely you are to be able to recover from a loss. But don’t take it to extremes! A generally accepted rule of thumb is the “100 minus your Age Rule”.
  
  This means that you invest your age (say you are 30) as a % in lower risk assets (like bonds, i.e. 30%) and the difference from 100% (i.e. 70%) in riskier things like stocks.

• Commitments: Of course, having people depending on you, such as children or parents, is a more than justifiable reason to have an aversion to risk. On the same way, financial commitments will undoubtedly hinder your wanting to make bolder choices.

• Assets and Income: You should always know which percentage of your wealth are you willing to sacrifice and lose. If an investment going south will dramatically affect your lifestyle, then obviously best avoid it. Ask yourself, if X asset or income source disappeared tomorrow, what would it mean to me? Would I have to go back to a job I hate, for example?

• Your reaction to risk: Ancestral Chad Lao Tzu said that the soldier that knows himself is worth double. Following on his words, take a deep introspection. Are you a naturally positive, or negative person? There's no wrong answer here, but you should consider it when knowing how to face risks. If you are going to panic sell when an investment is in the red, then find a way to manage yourself in this arena, make these investments a small part of your portfolio or simply delegate to a qualified financial advisor.

🤿​ The Risk Premium

Finance 101 will teach you that the levels of risk are usually proportional to the level of reward.

This in turned leads us to the concept of the Risk Premium.

This is the difference between an investment with a certain degree of risk against a risk-free rate of return like a US Government Treasury bond.

This calculation of a risk premium should be at the upfront of your investments, since it will help you decide which risks you are willing to take.

Risk Premium could be seen as a 'hazard pay' for our investments.

You can see it as the compensation a worker gets for performing a dangerous activity.

In a high interest rate environment (like today) the higher risk-free rate means that other riskier investments have to yield more to compensate for that risk.

So bear in mind when interest rates are low (which may happen again in the near future) the compensation for risky investments will also be lower.

And buying into those investments at that time may cause trouble in the future when interest rates rise.

😎 The Chad Takeaway

Be honest with yourself. Realize how much stress can you sustain.

Understand how much risk you are willing to afford, specially on worst case scenarios.

Always ponder, what are the alternatives to taking a risk and will this change my life unncessarily?

Don't forget: Only you will fully know what grade of risk you are happy with. But use all the tools of your disposal to learn where you land in this respect.

NEWS: 🇺🇸 US ECONOMY MAY DODGE RECESSION IN 2024

2023 was seen by several analysts as the year where the United States would finally be hit by a brutal recession.

However, it did not happen.

Experts and specialists still say that the worst is yet to come in early 2024. And to be honest there’s a lot of brown matter that’s about to hit the fan.

Economic activity is still operating below a sustainable level, with government spending reaching record levels.

Also, Mass layoffs are still lingering. As 2023 saw almost 33% of American companies reduce their workforce and 22% of companies expect to be forced to cut jobs in 2024.

In fact, 60% of Americans think that the economy is already in a recession.

But behold, fellow Chads. There might be a light at the end of the tunnel.

The FED managed to stall what many consider to be an unstoppable inflation in 2023, with a stern determination to cut their rates at least twice next year.

Let’s keep our fingers crossed and hope the worst outcomes don’t materialize.

CHAD OF THE WEEK: 🕵️ AGENT JUAN PUJOL

Picture this: It is World War II. Yeah, Axis vs The Allies.

How the hell does a man manage to earn himself both the Iron Cross, Nazi Germany’s highest honor, while also being made a Most Excellent of the British Empire?

Enter Juan Pujol.

Experiencing the atrocities of the Spanish Civil War, Pujol, having no experience in espionage and no James Bond movies to use as reference, had the undeterred wish to become a spy.

So he contacted the British Embassy in Madrid, offering his services as a spy.

And yeah, of course he was rejected.

Brits said no. But Pujol was going to be a spy whether they liked it or not.

He fabricated a false identity as a pro-Nazi Spanish Government official, and got the balls to play his farce in the face of the Gestapo.

And they bought into it.

Pujol quickly became a German informant. The German government granted him a monthly allowance and ordered him to relocate to London.

Of course he had no intent on doing that.

Instead, he moved to Portugal, a key neutral ally of Great Britain, and started to provide Nazis with blatantly false information.

The Germans thought he had successfully built an effective spy network (27 informants strong) gathering information for him.

Not a single one of them existed. Pujol was just sitting comfy in Lisbon just creating fake agent after fake agent. And the Germans were funding all of them.

Gestapo officers spent countless resources chasing down made-up convoys, chasing after imaginary double agents, based on the information Pujol was providing them.

He just made them believe they were always a little too late.

Eventually, the British Secret Service (MI6) contacted him.

Pujol played a key role on Operation Fortitude, making Nazis believe that Allied troops were going to attack on Pas-de-Calais, rather than on the beaches of Normandy.

The Normandy landings ended up being the pivotal point in the liberation of France.

What can we learn from Pujol’s adventures?

Sometimes you gotta create your own chances. You can’t expect other to always think you are just the right person for the job.

Savvy people will seize opportunities. Chads will make their own.

Not only that, but Pujol didn’t let rejection dictate his decisions. And once he was rolling, he had the courage and determination to keep up his blatant farce. Conviction in what you are doing is the name of the game.

You don’t need knowledge, approval, or hefty resources to allow yourself to dream and win.

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The Chad index (“the index”) is a combination of historical returns for the following assets:

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