Q. What questions I need to ask in order to assess my portfolio's ability to endure market risks?
A. Here are 3 questions that may help you evaluate your personal relationship with risk.
How much risk can you afford?
Your capacity for risk generally depends on your current financial position (income, assets, and expenses) as well as your age, health, future earning potential, and time horizon. Your time horizon is the length of time before you expect to tap your investment assets for specific financial goals. The more time you have to keep the money invested, the more likely it is that you can ride out the volatility associated with riskier investments. An aggressive risk profile may be appropriate if you’re investing for a retirement that is many years away. However, investing for a teenager’s upcoming college education may call for a conservative approach.
How much risk may be needed to meet your goals?
lf you know how much money you have to invest and can estimate how much you will need in the future, then it’s possible to calculate a “required return” (and a corresponding level of risk) for your investments. Older retirees who have sufficient income and assets to cover expenses for the rest of their lives may not need to expose their savings to risk. On the other hand, some risk-averse individuals may need to invest more aggressively to accumulate enough money for retirement and offset another risk: that inflation could erode the purchasing power of their assets over the long term.
How much risk are you comfortable taking?
Some people seem to be born risk-takers, whereas others are cautious by nature, but an investor’s true psychological risk tolerance can be difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently when they are tested by real events.
Moreover, an investor’s attitude toward risk can change over time, with experience and age. New investors may be more fearful of potential losses. Investors who have experienced the cyclical and ever-changing nature of the economy and investment performance may be more comfortable with short-term market swings.
A. Here are 3 questions that may help you evaluate your personal relationship with risk.
How much risk can you afford?
Your capacity for risk generally depends on your current financial position (income, assets, and expenses) as well as your age, health, future earning potential, and time horizon. Your time horizon is the length of time before you expect to tap your investment assets for specific financial goals. The more time you have to keep the money invested, the more likely it is that you can ride out the volatility associated with riskier investments. An aggressive risk profile may be appropriate if you’re investing for a retirement that is many years away. However, investing for a teenager’s upcoming college education may call for a conservative approach.
How much risk may be needed to meet your goals?
lf you know how much money you have to invest and can estimate how much you will need in the future, then it’s possible to calculate a “required return” (and a corresponding level of risk) for your investments. Older retirees who have sufficient income and assets to cover expenses for the rest of their lives may not need to expose their savings to risk. On the other hand, some risk-averse individuals may need to invest more aggressively to accumulate enough money for retirement and offset another risk: that inflation could erode the purchasing power of their assets over the long term.
How much risk are you comfortable taking?
Some people seem to be born risk-takers, whereas others are cautious by nature, but an investor’s true psychological risk tolerance can be difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently when they are tested by real events.
Moreover, an investor’s attitude toward risk can change over time, with experience and age. New investors may be more fearful of potential losses. Investors who have experienced the cyclical and ever-changing nature of the economy and investment performance may be more comfortable with short-term market swings.
RSS Feed
