Do you make this common mistake with your investments?
Last week I sent an email following the big gyrations in the market. The opening line was, “Hello volatility, my old friend.”
A cousin of volatility is risk.
Different people can tolerate different amounts of risk. Someone who thoroughly understands long-term investing may have a relatively high “risk tolerance.” By that, I mean they don’t stay awake at night if the market is jumping around.
For other people, if the market takes a 10% dive and a $500,000 portfolio is suddenly $50,000 leaner, they can’t sleep at night. They see retirement or legacy dreams going poof.
A common mistake many investors make, however, is paying no attention to their risk tolerance.
For a long time, it was more difficult for financial advisors to measure risk.
Well, I have good news. We now have methods to measure your risk tolerance.
As volatility and its cousin, risk, play their endless games, let’s you and I get together, take a look at your investments, and find out if you are invested appropriately, given your personal risk tolerance.
We can, in my experience, measure that quite accurately.
Here’s how.
In an article from the New York Times, As Stocks Gyrate, It’s Time to Measure Your Risk Tolerance,1 Robert Lieber listed several resources that offered help in analyzing an investor’s risk tolerance.
As Lieber pointed out, there are three broad steps in determining risk tolerance.
- Find out what you want to do, by when, and how much risk that will require.
- Find out your risk capacity. “Can your plan withstand major events that you may not expect, like a mentally ill adult child who requires expensive treatment, the death of a spouse or your own disability?”
- “Risk tolerance is the third and final step, and it’s all about feelings and personality.”
Did the author ever get that one right!
What I would like to offer you is a fresh look at you, your risk tolerance, and whether or not your investments are going to give you a wilder ride than you would like.
So, call me at Wealth Advisors. There’s no cost or obligation. We will do the analysis, and if your risk tolerance and investment risk are the same order of magnitude, I will send you on your way. But if there is a disconnect between these, we should continue having a conversation.
