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How To Do Risk Management In Investing?
Find out what is risk management and how to apply it in our investments.

Summary:
Investment risk and financial intelligence are correlated.
The chance of becoming a successful investor is minimized when we are risk averse.
Rather than being "conservative," put these strategies for managing investment risks into practice.
At the end of today’s talk, will cover our bonus question: What Is The Secret to Getting Wealthy? The real meaning of "pay ourselves first" and the reason why the wealthy don't save money like the poor do.
Investors frequently ask themselves, "How much risk am I willing to take?"
When discussing our investments with financial planners or stockbrokers, they will always ask about our risk tolerance, which refers to whether we are conservative or aggressive. They don't even recognize, sadly, that that's the improper question to ask.
Risk is not knowing what we are doing. Once more, the emphasis is on us rather than the investment.
We describes risk as investing blindly without understanding.
The distinction between "uneducated" and "conservative"
When considering investment opportunities, many individuals may describe themselves as "conservative." In practice, this term is frequently confused with "uneducated."
This means that the question financial planners should be asking is, "Are we educated or uneducated about our investments?"
Declaring oneself "conservative" is merely a risk management rationale that might readily be reinterpreted as "I'm uneducated, afraid, unsure of what to do, and unwilling to put in the effort to learn."
Consider this: Our financial planners will immediately realize we are uninformed about investments if we inform them that we are a conservative investor. Thousands of uninformed "investors" give their money to financial planners annually, and it's a dead giveaway that enables anyone with a questionable moral compass to prey on others’ vulnerabilities and sell them whatever they choose. But who can say for sure that they are genuinely looking out for our best interests?
Naturally, that is just something to think about if we are dealing with a real human financial planner. The total assets under robo management—which refers to a computer using automated algorithms to create and manage a client's investment portfolio rather than a live, breathing person who considers themselves an expert in the field—increased 15% in 2018 to $257 billion. By 2023, it was over $1 trillion. The financial advising industry is being transformed by technology at a rapid pace, and not always for the better.
Most financial planners adhere to the maxim, "The higher the return, the higher the risk." However, that's not entirely accurate. The reality is that higher financial knowledge correlates with lower risk, whereas lower financial knowledge correlates with higher risk. And that's why enhancing our financial literacy is essential; it's the only method to genuinely learn how to minimize investment risk.
Evaluating investment risk in another way
The investment risk dissuades many individuals, who are preoccupied with the notion that safety and comfort are worth more than the benefits of investing, which is risky.
They mistakenly believe that investing is dangerous when, in fact, the risk lies with the investor. Consider this: an investment is simply an investment, regardless of whether it is in a commodity, a stock share, a piece of real estate, or a company. We, the inside investors, decide whether a particular investment is suitable for us or not.
Start here if we are curious about how to lower investment risk: The more knowledge we have, the higher our chances of lowering investment risk. We must calculate every return on investment with facts and not opinions.
Additionally, we will be aware of the rationale behind our investments and the status of our funds if we have conducted our research. We lose control and our risk factor increases considerably when we simply hand our money over to a financial planner to invest for us.
Here's another way to consider this theory: Is a car driven by an experienced driver at 25 miles per hour dangerous? Likely not. A drunk driver operating the same vehicle at the same pace turns that vehicle into a weapon. The driver, not the vehicle, is to blame. It's the investor, not the investment.
The CASH-FLOW CIRCLE and Investment Risk
Some people think that intelligent people secures a good employment and saved their money instead of making dangerous investments.
In contrast, an affluent person with the wealthy context believes that a poor person’s context is dangerous.
As business owner and inside investor, we want to start our own company and invest our money instead of putting it away. We want to multiply money costly by moving from a cash flowing asset to a new cash flow asset among the assets’ classes that exist today. We want to create freedom and keep it by following the law when becoming wealthy.
The CASH-FLOW CIRCLE, which is composed of four types of people and two types of mindset when it comes to business and investing. The four types of people are the employee, and self-employed on the left side of the cash flow circle and the business owner and inside investor on the right side of the cash flow circle. See the diagram below to understand more about the CASH-FLOW CIRCLE or CFC, it provides the best explanation for their differing perspectives on the world. The two types of mindset are the poor context which belong to the ones of the left side of the CASH-FLOW CIRCLE and wealthy context belongs to the people on the right side of the CASH-FLOW CIRCLE.
Most financial planners subscribe to the adage, "The higher the return, the higher the risk." However, that's not entirely accurate. The reality is that: the greater our financial knowledge, the lower our risk; the lower our financial intelligence, the higher our risk. And that's why the only way to learn how to minimize investment risk is to enhance our financial intelligence.
Evaluating investment risk in other ways
Each cash flow circle, corresponds to a particular kind of individual and way of thinking.

As we can learn from the Cash-Flow Circle that those who operate with the poor context are paying the highest on taxes. Basically all of the people who operate from the left side of the CASH-FLOW CIRLCE end up paying the most in taxes. Even though their bosses and owners of the companies that they work for are paying way less than those working hard for earned income.
Mainly is because the United States is build as a capitalist nation, which favors the business owner and inside investor. Making legally for us to take advantage of the tax advantages provided in the tax code and laws.
Employee is represented by E on the left side of the “CFC”. A worker prioritizes a steady paycheck, benefits, and job security. He or she sells his time to an employer in order to achieve this. He or she neither understands how money works nor enjoys taking risks. He or she has a conventional education that equips him or her to be a good worker.
Self-employed represented by the S, which is also not the left side of the Cash-Flow Circle. An S prioritizes autonomy. He works for himself and has no employer. He has no employment. Instead, he is the employment. An S's issue is that he or she is unable to take time off. He or she ceases to earn money if he or she does not actively work. Basically being employees of their own job.
Business Owner is represented by the letter B. A major business owner lacks both employment and ownership. Rather, we possess a system of systems doing the selling and telling for us with product solving a problem in the world. The sales are done autopilot from our systems that we control. We have financial independence because we can quit working and continue to receive the passive income from our businesses and investment. Our attitude is, "How can we employ others to generate money for me in the system we have created?"
Inside Investor is represented by I on the right side of the Cash-Flow Circle. An investor holds the opinion that wealth may be invested to generate additional wealth. We are skilled at generating passive income through asset investments by utilizing debt, taxes, insurance, and other legal means. We must view the globe as one of plenty and opportunity. We must master using good debt to invest in real assets that we control with our companies.
Investment risk on both sides of the CASH-FLOW Circle
The CFC is clearly split into two halves: E and S are on the left and B and I are on the right.
People on the left side often lack knowledge about finance, entrepreneurship, and investing, and they are afraid of taking chances. However, it is their lack of knowledge that makes investing and entrepreneurship appear dangerous.
People on the right side view the world differently and understand how money and investments operate. They think that owning a large company or making investments is less dangerous than being an employee or self-employed since we lack three things: control, knowledge, and training.
Majority of people in the world will always spend their entire life on the CFC left side. They focus on making earned income their priority. Which is taxed at the highest bracket and must be made by exchanging time for money, actively working for money.
As a business and inside investor we must master how not to work for earned income rather we need to focus on working passive income. This requires higher level of financial intelligence. We must make investing our priority to make this a reality. We must learn to spend money correctly. Throughout his life, majority of people endured many difficulties and frequently expressed his dissatisfaction with his financial situation. Similar to the game of Monopoly, Master Investor traded up his properties for hotels over time, and he increased his money annually.
Redefining the meaning of risk
When it comes to stock investment, we provide the following two guidelines:
Don't invest in a firm unless we comprehend how it generates revenue.
It most likely is if it seems too wonderful to be true.
As we have learned, while no investment is ever completely guaranteed to be safe (loss-free), there are things we can do to lower our risk and improve our odds of success:
Educate ourselves financially.
By actively investing a small portion of our money, we may get hands-on experience.
Comprehend the investment and its returns.
Take charge of our investments.
Be our own financial advisor.
Everyone errs in their investing decisions. And most individuals are preoccupied with other matters and don't want to deal with complex finances and figures. It is far more convenient to give someone else our money to invest for us or to join in our business's 401K.
Three things to stay away from in investment risk management practices
We have discovered the three critical factors that led the poor context mindset to believe that investing is risky, as well as why investment risk was a reality for poor mindset people, after a lifetime of examining the lives of both the wealthy context and poor context.
Investment Risk #1: Insufficient Training
See our piece on the three types of education: academic, professional, and financial.
The majority of individuals receive academic and professional instruction in school to learn how to work for others or for themselves. School teaches us practical skills like reading, writing, and mathematics that are beneficial in the workforce. It instills in us the employee mentality of following orders from our bosses and being where we are instructed to be at the appropriate time.
Some individuals pursue further education and prepare for well-paying careers such as medicine, law, or accounting. However, in the end, they are either self-employed or well-compensated workers. Only a small number of individuals who concentrate on professional or academic education are able to transition from the left side of the CASH-FLOW CIRLCE to the right.
Regrettably, schools do not teach students how money works or how to make it work for them. It doesn't provide us with the skills required to be an investor or a business owner. Starting with the four fundamentals of financial literacy, we must actively seek out and educate ourselves on those abilities.
As a result, the majority of individuals do not have the necessary training to understand how to reduce investment risk. Additionally, investing is dangerous without training and expertise.
Fortunately, masterinvestor is here to help us improve our financial knowledge through our coaching, classes, and games and books.
Investment Risk #2: Lack of Control
As they saw their stock portfolios plummet during the last Great Recession, it was probable that many began to think that investing was risky. And once more, it's probable that a large number of people were killed during the worldwide coronavirus pandemic.
The truth is that the majority of individuals lack a genuine investment strategy.
Rather, they put in a lot of effort and give their money to an "expert" who invests it in bonds, stocks, and mutual funds. The issue is that these kinds of investments raise the risk of losing money. We have no authority. We are entirely dependent on the markets and managers. That puts us in a risky situation.
In contrast, successful investors aim for as much control as they can get to lower investment risk. Indeed, we've written an article discussing the ten essential investor controls that a savvy investor must possess in order to succeed.
That's why real estate is a good investment choice (because it may lock in cash flow for long periods of time), and it's also why we should put money into companies where we have the ability to make decisions. In either scenario, the investor has significant influence over the fate of the investment.
Investment Risk #3: Lack of Understanding
Most of us instinctively understand that being inside is necessary if we want a real deal. It's common to hear someone say, "I have a friend in the business." The type of company is unimportant. It might be for a new dress, tickets to a play, or a car. Everyone understands that agreements are reached "on the inside."
The same is true for the investment world. If we are not on the inside, we are outside.
Generally, workers and self-employed individuals make investments from outside, where there is a high level of risk involved. Their understanding of what they are truly investing in is quite restricted.
Individuals who work as professional investors and business owners have a thorough understanding of the inner workings of their investments or enterprises. Because they have the insider information that considerably reduces the risk of their investment and are the ones driving the business or investment.
What seems safe could actually be quite dangerous?
Is it safe or dangerous? When it comes to investing, those terms must be redefined. Here are three places that conventional financial advice has recommended as safe for us to "invest" our money.
Are these investments safe or hazardous?
Mutual funds
401(k) s
Savings
The average financial planner will assure us that they are secure. Why will successful investors say otherwise?
Savings
Our money is worth less and will purchase we less in the future as a result of the declining value of the dollar and other worldwide currencies. Additionally, the fees and costs associated with maintaining your money in the bank may be higher than the interest we earn from the bank on our savings. In many instances, we might be losing money by saving it. Would we categorize that as a high-risk or low-risk investment? An asset is an investment that repeatedly loses money.
401(k) plans and mutual funds are fake assets
A mutual fund is just a bundle of other similar investments, such as bonds and stocks. A firm that aggregates the funds raised from numerous investors and then invests them in stocks, bonds, and other comparable paper assets could also be involved.
A 401(k) is an employer-sponsored retirement plan, typically viewed as a retirement savings plan, that permits workers to deposit a percentage of their pay into it. The employee's contributions to a 401(k) plan are invested in mutual funds. Similar plans are available in other nations under different names, such as the United Kingdom's pension scheme, Japan's 401(k), Canada's RRSP, and Australia's and New Zealand's superannuation plans.
What is the reality of mutual funds?
It is fantastic, indeed. For an individual who is now 20 years old and beginning to save for retirement, let me provide all of us with a longer-term example that we discuss in other talks. That an individual has roughly 45 years until retirement—20 years until they turn 65—and then, according to the actuarial tables, another 20 years until death finally ends their life. That amounts to 65 years of investment. With an 8% return on a $1,000 investment made at the start of that period, the total would be approximately $140,000 after 65 years.
In this case, the mutual fund system will deduct around 2.5 percentage points in fees from that return, leaving the person’s with a gross return of 8 percent and a net return of 5.5 percent. Instead, over the course of 65 years, the $1,000 will grow to roughly $30,000, with $110,000 going to the financial system and $30,000 going to the person, the uneducated investor (saver and employee or self-employed.) Mutual funds and other toxic investment vehicles are liabilities because they take money instead of making money for the uneducated investor.
Give that some thought. This implies that the financial system received about 80% of the return while contributing nothing in capital, taking no risk, and incurring no costs.
Furthermore, the saver—the uneducated investor in this long-term investment, which lasts a lifetime—provided all of the money, assumed all of the risk, and received just around 20% of the return.
Due to these costs—some of which are hidden and some of which are visible—associated with financial advice and brokerage, uneducated and saver investors are being failed by a financial system that is failing them today. Therefore, the system must be repaired.
The mutual fund firms, the salespeople, and the managers all profit regardless of the financial success. The majority of people are unconcerned with the fund's real performance. Their primary concern is with their fees and commissions.
Is that safe or dangerous?
How can we reduce the risk of our investments?
No investment is without risk in the world of finance. We will both gain and lose money when we invest. That is a sure thing. However, there are definitely ways to increase safety and decrease risk.
Actively striving to shift our mentality from the left side of the CASH-FLOW CIRCLE to the right side is the first step in reducing investment risk.
However, investing on the left side is much more difficult because there are numerous opposing factors, primarily a lack of control, even with experience and expertise. This is not to say that they cannot invest on the left side. Furthermore, individuals on the left side sell their time, which means they seldom have the same amount of time to handle their investments as those on the right side.
Gaining the appropriate training and knowledge and applying it so that we may be in a position of authority is what moving to the right side of the cash flow circle entails. This implies that we should regularly improve our financial knowledge through seminars and coaching. We must, however, put that knowledge to use in the end. Nothing teaches us more than experience, failure, and perseverance.
It takes financial knowledge and experience to transition from a risky investment posture to a secure one. Evaluate our investment stance honestly, and take the actions required to gain knowledge, control, and training. It will be one of the most intelligent choices we ever make.
Why Investing With The Cash-Flow Tetrahedron Formula Is Key?
When we invest and plan our plan to becoming wealthy by using the following proven formula to investing like the ultra wealthy invests. We focus on becoming truly financial knowledgeable so that we can solve financial problems with lucrative solutions. By investing using the formula of the CFT is key to achieve ultimate wealth and rise to the highest level of an investor level 5 or a capitalist investor.
Using the CFT to structure our investment strategy, we can create money from thin air legally, and obtain our assets and liabilities for free legally. Because we have mastered raising capital and making passive income with that capital we raised for investments. Focus on building and acquiring business that produce positive cash flow and use the cash flow to fund other sound investments in different assets classes such as real estate, crypto, paper assets, and commodities. Our positive can flow from our business will begin to pay all of our expenses and other investments. Which means that since we are using OPM other people’s money (debt, loans, cash-flow form our business) to expand such positive cash flow even more constantly diversify among the 5 assets classes.

Bonus: What Is The Secret to Getting Wealthy?
Always paying ourselves first and making investing our number one priority on our expense column on our personal financial statement.
Quit saving our money if we want to get wealthy.
Don't let bad debts prevent us from getting wealthy.
The 10/10/10 Rule: A Guaranteed Way to Get Wealthy
Who does an employee and self-employed pays first when either one gets a salary? Like the majority of Americans, they are likely prioritizing rent, mortgage, food, electricity, car payments, insurance, and other expenses. Majority don’t even have investing as an expense. Then, after the employee and self-employed or the poor context have settled all of those expenses, then they put whatever is left (if they have any) into savings. This is the typical example of "paying oneself last." The poor mindset then patiently waits for the next salary or paycheck. The poor context person then goes through the entire procedure again that makes them poor. That's the big American rat race.
However, if anyone ever wants to escape the Rat Race, then the person must acquire the wealthy context and shift the values about money. It takes financial education, financial experience and excess of positive cash-flow to succeed in investing,
Rather than saving, the wealthy do this.
The 10/10/10 Plan
The 10/10/10 strategy to create more wealth. Each month, an employee and self-employed can split 30% of their paychecks as follows:
10% Investment - They save 10% of their monthly income for amazing investment chances. They usually decided to put their money into real estate.
10% For Financial Education and Special Moments - Then the person shall allocate 10% of the monthly earned income for emergencies and unique occasion. This was not a savings account meant for sustenance. This to increase the purchasing power of the person.
10% Charity or Tithing - And since they have faith in giving back and that we must give in order to receive, a person shall proactive becoming more generous as it is how we become wealthier. Being generous is the key to become wealthy beyond our dreams. Every business is created to solve a robot in the world, so we have to be generous to solve other people problems as we have think of others too and give them what they are in need off. The person shall dedicate 10 percent of their monthly earned income to tithing or charitable contributions of their choice.
Don't save money if we want to get wealthy
Saving money is a popular piece of poor context mindset financial advice. Saving money does not lead to wealth accumulation or maintenance. Saving is a surefire way to fail in business.
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