One of the biggest questions for any investor—especially someone who is saving for retirement—is how much risk is acceptable. Determining personal risk tolerance is one of the most important steps a retirement investor can take when deciding which kinds of investments to make. Here are a few questions a person can ask themselves to assess their risk tolerance.
What Are Some Important Investment Goals?
Any risk tolerance assessment should start with questions about goals. While retirement investments all have much in common, each person’s goals may differ. Some people may want to travel around the world, while others may want to finally buy a home of their own or pay for a child’s education.
Determining the reason for the investment is a crucial step toward setting an acceptable level of risk—and it can help an investor estimate their funding requirements. Visit https://walkercpg.com/ to learn more about retirement investing and risk tolerance.
What’s the Timeline?
A person’s retirement investment goals will help them establish a timeline for using the money they’ve invested. Typically, the longer the time frame, the more risks a person can safely take – such as is common with retirement investments for younger employees. If an investment loses value, there’s plenty of time to recover before the individual is relying on those funds. While economic downturns happen and past performance doesn’t guarantee future results, the stock market has historically returned roughly about seven percent per year when inflation is considered.
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Are Short-Term Losses Okay?
Investments tend to go through short-term fluctuations, and retirement investments are no exception. It’s important for investors to keep in mind that, with stocks and other investments, shares may go down in value but the losses aren’t seen until the investment is sold. If you have to sell shares regularly for the retirement distributions that allow you to pay your monthly bills, those losses can be locked in. Hence the saying, “Don’t gamble with the rent money”.
Are Any Non-Invested Savings Available?
No matter a person’s risk tolerance, it is crucial for them to have some type of savings in a liquid account. If there is an emergency, such as a serious accident or a job loss, it is easy to access that cash without being forced to liquidate an investment account. However, if a person keeps most of their savings in cash because they are concerned about investing, it indicates that they are risk averse. While cash may not experience market volatility it is constantly having it’s spending power eroded by inflation.
Will These Investments Be Tracked Daily, Weekly, or Infrequently?
Let’s say a person invests in an index fund that tracks the S&P 500 or the Dow Jones Industrial Average. Would they read the newspaper’s business section every day, or would they follow the stock’s ups and downs online? In either case, would they do it because they’re nervous or because they are excited about a new opportunity?
If a dip in the market brings feelings of worry and trepidation, a more diverse portfolio and a focus on long-range goals may make those downturns easier to handle. Remember that asset allocation and diversification don’t guarantee good returns or prevent losses but they do help you find balance.
If a person who’s planning for retirement is actively searching for investment opportunities and taking advantage of them regularly, they are usually able to take more risks. If this applies, be sure to learn more about those investments. While higher risk tolerances can and do pay off, being too reactionary may create unnecessary risks and the amount of risk that is appropriate changes as we evolve through the different phases of our careers.
Assess Risk Today for a More Comfortable Retirement Tomorrow
While all investments come with a certain level of risk, setting a good risk and reward balance is the best way to build a diverse retirement portfolio. Consider working with the experts at Walker Capital Preservation Group to assess risk tolerance and form a plan that addresses specific retirement goals.