If you’re like a lot of investors, you may have trouble quantifying the level of risk you are comfortable taking on in your portfolio. Do you like to play it safe, staying in conservative investments even if it means potentially missing out on bigger returns? Or are you willing to take on more risk in the hopes of capturing higher gains? If you’re not sure where you land on the spectrum, consider the following eight tips to help define your views on investment risk:
- Define your goals. Your financial plan should be structured to help you get from where you are now to where you’d like to be with key goals, such as saving for your child’s college education or retirement. Your investment strategy should be a key part of this financial plan. Define exactly how much money you will need to save, and when you will need it by. When your goals are crystal clear, it can be easier to weigh the various risks and choices you must make to achieve them.
- Consider the general market environment. It seems fair to say that investors’ willingness to accept risk increases in periods when the stock market has performed well for an extended period of time. In the past decade, stocks have generally been on the upswing. On the heels of such a positive market, investors’ level of confidence about owning assets that are subject to fluctuation may be higher. By contrast, investors sometimes become more skittish in periods when markets are struggling. Confidence in stocks and other variable investments tends to decline when the market is not performing well.
- Accept market moves as normal. It’s a known fact that stock markets move up and down – sometimes significantly – which means there’s always risk that a particular investment could lose value. Keep in mind that historically markets have recovered, and the reward potential of investing in future growth of global businesses remains strong. Prepare yourself for the fact that investing is not a smooth upward climb, and a smart strategy can help the market moves work in your favor.
- Recognize that time is one of the biggest influences on risk tolerance. If you have a decade or more to reach your goals (such as retirement), you likely can ride out market downturns or even extended flat or negative markets. If you expect to reach your goals (such as a new home) in the next few years, you may need to think more about how to protect your investments against the impact of market moves. With this in mind, your risk tolerance will likely adjust as you get closer to achieving various goals.
- Trust your instincts, but don’t make decisions solely based on emotions. If you are worried about what’s ahead in the markets or how your finances would fare if another Great Recession occurs, it may be time to reassess your portfolio to take some risk off the table. Yet, it’s important to not be overly swayed by day-to-day headlines. Look for consistent, long-term trends or events that impact market fundamentals before considering action. And, be sure that any decisions you make align with your financial goals, as defined in tip #1 above.
- Consider purchasing power risk. Inflation is always a factor worth considering. Simply stated, your money more than likely won’t be worth as much in the future as it is today. It is important to own investments that can help your asset base at least keep pace with inflation, and hopefully grow faster than the cost of living.
- Be mindful of interest rate risk. Fixed income instruments such as bonds carry their own risks, one of them being that if interest rates rise, bond values will decline. Given that yields are slowly rising from historically low levels, this risk may be more significant today.
- Explore ways to stay invested in the market while mitigating some of the risk. Maintaining healthy diversification across a variety of asset classes is a key way to manage risk. Staying invested for the long-term and not trying to time the market is another. Dollar-cost averaging, or investing consistent amounts of money at regular intervals, rather than investing lump sums at one time, can help you remain committed to your saving strategy. Additionally, products (such as variable annuities) that allow you to continue to participate in the market’s growth potential while locking in gains may also be worth considering.
Given your timeframe, current savings, income and other financial priorities, how much risk are you willing to take to achieve your goals? This is the ultimate question you need to answer to determine your risk tolerance. If you want help deciding whether your portfolio is appropriate for your feelings on risk, consult a financial advisor who can provide a second opinion.
Thomas R. Pasta, CFP® is a Private Wealth Advisor with Trident Wealth, a private wealth advisory practice of Ameriprise Financial Services, Inc. in Annapolis, MD. He specializes in fee-based financial planning and asset management strategies and has been in practice for 21 years. To contact him, call 410-224-7581, or visit our office 711 Bestgate Road, Suite 201, Annapolis, MD 21401.
Diversification and dollar cost averaging does not assure a profit or protect against loss.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
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This opinion piece was written by Joseph Maltby, a change management specialist in the U.S. federal government and a member of Young Government Leaders.
The data, turning on the news, and even our own experience tells us that there is intense political disagreement right now. Not just over the right thing to do but even on basic facts. People disagree about which pieces of evidence are real, what they mean, and who can be considered a reliable source. Leaving aside the question of why this is happening, there’s another question to answer about what it means for government and the work of you, the leaders who make it work. What might the next 10-20 years look like for you? There are three scenarios to choose from and prepare for. Which one do you find most convincing?
Spring is on the way. For many of us, the increasingly longer days and warmer weather signify a chance to tidy up and start fresh. If you enjoy the ritual of spring cleaning, why not take time to spruce up your finances as well? The following list is a great place to start:
1. Your goals. If you set New Year’s financial resolutions, now is a good time to evaluate your progress. If you’re on track – excellent! If you’re not where you hoped you’d be, recommit to your goals. Identify what obstacles are in your way and create a plan to overcome them. If you need help deciding what to do next or how to stay on course going forward, consider meeting with a financial advisor who can provide you with a second opinion and help keep you accountable to your progress.
2. Your portfolio. As you evaluate your financial goals, it may be helpful to also review your portfolio, as the two often go hand-in-hand. Take a look at your asset allocation and ask yourself the following questions: Are you still diversified and invested according to your ability to withstand a potential market drop and the timeframe of when you need the money? And, do you understand why you are invested in the assets you have? Answering these questions can help you decide if you need to rebalance your asset allocation or make other adjustments to your investing strategy.
3. Your budget. There’s a good chance that your cash flow needs will vary in the summer months to come. In addition to summer travel, you may need additional funds for things like child care or extracurricular programs while your kids are away from school. Take time to plan ahead now so you can enjoy the summer fun while still feeling confident that you’re prioritizing retirement and other financial goals.
4. Your credit report. Did you know the three major credit bureaus – Equifax, Experian and TransUnion – are required by law to provide you with one free credit report annually? Make it a habit each spring to check your credit report. Doing so is a good way to ensure accuracy, protect against identity theft, and help you prepare for what interest rate you may receive if you plan to make a big purchase soon (such as a vacation home or new boat).
5. Your protection needs. While de-cluttering, take time to review life, home, auto and disability insurance policies to make sure you are still satisfied with your level of coverage. If you’ve experienced any life-changing events, such as divorce or the birth of a child, it’s possible that your needs have changed.
6. Your benefits. Even though open enrollment is typically in the fall, spring is a good time to make sure the benefits you selected are being maximized. Scheduling regular appointments with medical professionals, your eye doctor and dentist can be a great place to start. Also, check to see if you’re eligible for any elective benefits you’re considering, such as a new pair of eye glasses or orthodontic work.
7. Your estate plan. Estate planning is important regardless of your net worth. It’s never too early to create or update your will, health care directive, beneficiaries and basic powers-of-attorney – all of which can help your loved ones make decisions in line with your wishes in the event of your death. If giving assets to your loved ones and/or reducing your tax liability are important to you, an estate plan can also help you with strategies to accomplish those goals.
As with many spring cleaning projects, it’s possible to get overwhelmed as you review your finances. If this happens to you, step back and take each task one at a time. A financial advisor in your area can also help you get “unstuck” and identify ways to re-energize your finances.