No one can predict when precarious situations will arise. Investments can lose value brought about by a broad decline in the financial markets due to economic or sociopolitical factors. This is the market risk that all stocks are exposed to.
Some investors may accept more risk by keeping a large portion of their portfolios in stocks that may yield higher returns in good times but get hit harder in bad times. Having a smaller percentage in stocks, on the other hand, would mean a more conservative portfolio that is less volatile but with lower potential for gain during market upswings.
Knowing your ability to financially and emotionally endure periods of market volatility would determine your portfolio’s risk profile. Ask yourselves these questions to know your risk tolerance:
What is your capacity for risk? How much financial risk you can handle would depend on your income, assets and expenses, as well as your age, health, future earning potential and time horizon. How much time it would take for you to start tapping on your investment assets for your retirement becomes your time horizon.
As a general rule, the longer your money is invested, the likelier it is for you to ride out the volatility that comes with riskier investments. You can have an aggressive risk profile if you’re investing for retirement that is many years away. But if you are retiring within the next few years or are already retired, you might want to consider a more conservative approach.
How much risk is required to meet your goals? Calculate your “required return” or the corresponding level of risk needed for your investments. You can arrive at this by knowing how much money you have to invest and by estimating how much money you will need in the future. Remember, though, that you can never be sure that an investment would achieve your targeted return.
If you are older with enough income and assets to cover expenses for the rest of your lives, you may not need to expose your savings to market risk. Although there are some who are averse to risk but still need to invest more aggressively to accumulate enough money for a long retirement and offset inflation.
Were you born a risk-taker or are you cautious by nature? Your true psychological risk tolerance would depend on how comfortable you are at taking risks overall. When tested by real events, one may act differently.
An investor’s attitude toward risk can change over time, with experience, and age. Novice investors may be more wary of potential losses while experienced investors may be more at home with short-term market swings, knowing the cyclical and ever-changing nature of the economy and investment performance.
A well-balanced portfolio appropriate for your long-term goals and risk tolerance could help you weather the current volatility. Contact us for a sound investment strategy that should carry you through market ups and downs.
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