Investing always involves some degree of risk. As you plan for your future, you want to invest your savings in such a way that you generate enough growth to provide a secure income in retirement. On the other hand, you don’t want to take unnecessary risks with your money – and what is considered “unnecessary” to one person might seem quite acceptable to another.
That’s why it is so important to understand your own risk tolerance before making important asset decisions. You probably know that in the financial world, more potential for growth almost always equals more risk. Just how much risk is too much for you? Only you can decide, but in general we’ve discovered that certain rules apply to most people.
Your risk tolerance will change over time. For a 35-year-old who is facing thirty years of career before retirement, higher risk might appear attractive. They promise a potential for significant growth, yet there is plenty of time to make up for losses if they occur.
Contrast that situation with a 60-year-old who is nearing the end of their career, and eyeing their target retirement date. That person has accumulated significant savings, has less need for significant growth, and doesn’t feel comfortable with taking large risks with their principal so close to retirement. So your risk tolerance should, and probably will, change over time.
Some degree of risk might always be necessary. While it makes good sense to protect your principal as you enter retirement, it is important to consider the impact of inflation upon your retirement plan. If you plan to live on your retirement plan withdrawals for the next twenty or so years, inflation can seriously erode your purchasing power over time. You probably do need to consider your need for growth, which might mean that your financial strategy can’t be 100 percent risk-free. But again, this decision is a very individual one.
We can help you assess your risk tolerance, and then make the asset allocations that best suit your situation. Schedule an appointment with us to get started. Then we will help you continue to balance your portfolio, to reflect your changing priorities over the years.