To gain a better understanding of how we’re affected by risk when building a retirement portfolio, it’s important to learn about risk tolerance and what it means for you as an investor.
What Is Risk Tolerance?
Risk tolerance essentially refers to an investor’s ability — both emotionally and financially — to deal with major upswings and downswings in the market. If a person is said to have high risk tolerance, he or she likely tends not to worry so much about the potential risk of certain stocks or having a large amount of stocks in a portfolio. Those with low risk tolerance are on the other end of spectrum, often too cautious to deal with volatile stocks or the market in general.
Risk Tolerance and Age
While plenty of factors must be taken into consideration when considering your own risk tolerance, age is one that can be seen as an important anchor to help risk-takers avoid getting in over their heads. This is especially true of those who are working toward building an effective retirement plan. When people are young, it makes more sense to take risks with investments than when they reach retirement age.
What's important to recognize is that risk tolerance must shift with age to avoid making costly mistakes at a time when it may be potentially too late to recover.
Adjusting Risk Tolerance
It may seem as if adjusting risk tolerance is challenging, but often it simply means taking a realistic approach to your investments. If you’re nearing 60, for example, it’s generally considered unwise for your portfolio to be comprised of 70% stocks — the number should be closer to 40%. Many successful investors find moving away from stocks to bonds is an effective later-in-life strategy.
The Importance of Working with a Financial Planner
The best way to get a better sense of what is a realistic risk tolerance for you to have at this point in life is to work closely with your financial planner. Please call if you’d like to discuss this in more detail.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.