As an investor, you’re taking on a certain amount of risk. However, there are two different kinds of investment risk you need to be aware of: your own unique risk tolerance, and the inherent risks of the stock market. When you understand the ins and outs of both of these, you’re better equipped to make decisions regarding your portfolio that will positively impact your short and long term financial planning.
Assessing Your Risk
Speaking in general terms, there are three types of risk portfolios that you might fall into: conservative, moderate, and aggressive. Each portfolio type involves a different kind of asset allocation and strategy. However, understanding which category you fall into may be more complicated than you think.
You have both a risk capacity and a risk tolerance. Your risk capacity is how much risk you can feasibly take on while keeping you on track to meet your investment return or savings goals. Your risk tolerance is how much risk you’re actually willing to take on. Measuring your risk capacity is fairly straightforward, but knowing how much risk you’re willing to take on is a much more individual, emotional decision.
Everyone copes with money differently – when you invest you’re bound to have good days and bad days, and the long term strategy is to have things continually trend in a positive direction to help you reach your goals.
Knowing The Risk of the Market
In the past several years, there have been several market drops. Of course, we can look at the 2008 crash – where the DOW Jones fell approximately 777 points. More recently, we can also think of 1,033 point drop at the beginning of February 2018. The truth is, the market drops sometimes. Occasionally, it’s because it has overcorrected. Simply put, the stock market has been doing too well and it drops to correct the sudden rise, then balances out somewhere in the middle. Other times, it’s a result of economic or political events. The point is – the stock market comes with risk.
Understanding the risk you take on when you invest in the stock market (even if you’re a conservative investor) is important. By having a solid grasp of the risks you face, you’re better able to prepare yourself in the event of a market crash, and make financial decisions accordingly.
Staying True to Your Goals
Balancing your unique risk tolerance with the inevitable risks of the stock market can feel tricky. However, the key is to focus on your goals and keep them in mind when making decisions about your investment portfolio. Rather than focusing on a numbers-based goal, it can be helpful to think about the kind of retirement you want to have (or even the kind of long-term goals you’d like to achieve apart from retirement). Knowing the goals you’re working toward, and how investment risk plays into them, can help you form a holistic plan that keeps you on the right path moving toward the life you want to live.
At Premier Wealth Advisory Services, we focus on addressing the market’s risk with your unique risk tolerance to create an ideal investment portfolio for your financial life and goals.