How Much Risk Should I Take in My Investments?

Whether you’re planning for the birth of a child or planning for retirement, when it comes to devising a strategy to accomplish your task, everything is subjective. There are no absolutes in life and there are certainly no absolutes when it comes to finances. So if you trying to measure the amount of risk you should be taking with your portfolio, i.e., your risk tolerance, there are a few things you need to consider.

First, what are your goals, dreams, or aspirations in life? When you look back 5, 10, or 20 years from now, what would you have liked to accomplish?  This is one of the single most important steps when it comes to investing. If you don’t know where you’re going, you’ll never know how to get there. You can’t calculate the return on nothing. So get on the right track by knowing what you need. If your goal is to be financially secure, ask, “Can I live on $50,000 (or whatever your number might be) a year or will I need more to maintain my current lifestyle?” If you need to earn a 10% return on your investments, then investing to achieve a  3%  return isn’t going to yield the results you need. If you’re planning a road trip to Canada, you can’t get there by driving south. So, set a goal.

After you know the need, start mapping out a blueprint of what you want. Do you want to retire at 60 or 65? That will dictate the amount of return you want to earn. You may only need 3%, so, you may not want to take the risk of investing so aggressively trying to get a 10% ROI. However, you want to do a little better than 3%. So, you increase your risk to try to earn at least 5%. Decide what you want.

Next, where are your emotions? Some people want to reach certain goals and are willing and ready to handle the volatility of the market. Others may feel more comfortable altering their goals to keep a steadier return on the investments because they realize they can’t handle the inconsistency. Money is very much emotional and at times our emotions just don’t line up with our wants or needs.

Finally, you’ll want to build an investment policy statement. This is a governing document to help guide you through the tough times. It’s a declaration of exactly what to do when life happens because inevitably it will. You could lose your job, a family member becomes terminally ill, maybe you go through a divorce, whatever the circumstance this will keep you on track and when your emotions or the market seem to be out of control, you won’t be derailed from your goal. Life is hard but this will keep you accountable to your original plan.

RELATED ARTICLE: Investment Basics Part II – Risk Tolerance & Investment Horizon

So how much risk should you take on your investments? That depends on you. That’s why turning to your CERTIFIED FINANCIAL PLANNER™ professional to help determine how to merge your needs, wants, and emotions is essential.

Do you need a CFP® professional to help customize an investment plan that fits your unique needs and goals? Reach out to us! Our team is always here to help.