Today we’re taking a look at the important topic of Risk in your investment portfolio. What do you need to know about investment risk? How can you be sure that you have the right amount of risk in your portfolio?
Risk is the potential for loss or volatility in an individual investment. Typically the greater the potential for risk – the greater the possibility for return.
It’s important that you understand how much risk you need to take to generate the necessary return to achieve your financial goals. Additional, there are other concerns to think about:
your time frame – how long until you need this money.
your emotions – are you able to handle the potential drawdowns in our economy?
We saw the importance of understanding investment risk in March of 2020 when we experienced the initial response to the Coronavirus pandemic as much of our economy was shut down. At that time the stock market went into a drastic pull-down of 30+% over just a few weeks. The individuals that understood their investment risk and had a clear plan for their investment accounts were able to weather the downturn with less personal stress. On the other hand, in the months that followed I spoke to people who didn’t understand how much risk they had in their portfolio and didn’t have a clear plan for those investment. In many cases they sold investments or made moves when the market was on the way down. Then they were left trying to determine when to get back into the market when it was on the way back up later in the summer.
I would encourage you to start at a basic level. To determine how much of your portfolio should be invested in stocks the general rule of thumb is to subtract your age from 110. For example – if you’re 50 years old you should have 60% of your portfolio invested in stocks. That’s a good starting point, but it may not be right for your situation.
As life expectancies expand and interest rates remain low, many people are taking greater risk – investing in more stock – in order to achieve their financial goals, so that they can live the retirement lifestyle they desire.
We use a tool call Riskalyze to help everyone be a “fearless investor.” They do this by helping you pinpoint the exact amount of risk you feel comfortable with in your portfolio. This helps you avoid emotional and potentially damaging behavioral reactions triggered by the extreme market volatility. Also, to ensure that you have the right amount of risk in your portfolio
Take a few minutes to answer the questions regarding your responses to risk. You will be assigned a risk number. This gives you an idea of how much risk you feel comfortable with on both the upside and the downside. After you determine your risk number, give us a call to determine how your risk preference aligns with the amount of risk you need to have in order to achieve your financial goals.
When I complete this exercise with clients they are often surprised to compare how much risk they are comfortable with to how much risk they actually have in their portfolio. I think it’s important to take this risk quiz after a positive run in the stock market such as we have had to assess how much risk you have at this moment and determine if this is something that you are comfortable with going forward.
Think about the returns you have in your accounts over the past few months. Then consider if you need to reduce the amount of risk in your investments going forward in order to prepare for the possibility of pull-back in the market.
We would be glad to discuss with you how much risk you have and how much risk you need to have. Our goal is that you be well-positioned to move toward your long-term game plan of accomplishing your financial goals.