As 2016 draws to a close, take time to reflect on the changes that have occurred in the past 12 months and how they might affect all aspects of your life - including your investment risk tolerance.
As year-end approaches, consider taking the time to meet with your financial advisor to review your investment portfolio and other financial accounts. Key to that discussion should be an objective appraisal of your risk management strategy.
While that may be a prudent place to begin, it's important to remember that an investor's personal risk tolerance may at some point come into conflict with changing market conditions and evolving life circumstances, whether they involve a marriage, a birth, or an impending retirement.
For example, if an investor maintains a high tolerance for risk but has a 10-year plan that only requires a 5% annualized return, that high appetite for risk may expose his or her investments to more uncertainty than necessary.
As you review your long-term financial objectives with your advisor be sure to ask the following:
- Does my asset allocation have the potential to generate the returns necessary to achieve my investment goals over a defined span of time? 1
- Am I taking on too much or too little risk?
Understanding the different types of risk that could affect your portfolio may give you a greater sense of control over the decisions you'll need to make as situations change over the years. And by embracing the concept of risk, you'll be in a better position to create an asset allocation strategy that suits your individual needs.
The Risk of Not Investing Appropriately
When thinking about how to balance risk and return in your portfolio, don't forget that the risk of loss is not the only kind of risk. Give some thought to the risk of investing too conservatively and not reaping a high enough return to provide for your financial future. Also be aware of investing in instruments that may be too risky for your shorter-term goals. Your financial advisor can help you select vehicles that are suitable for your objectives.
As you consider each particular investment, research its performance history and risk characteristics. For example, if it's a stock, how drastically has it responded to drops in the market? 2 How long has it taken to recoup losses? How has it performed over a time frame similar to your own?
Using Risk to Its Full Potential
In life, almost every attempt at success involves some risk - and your investment strategy is no exception. By devoting time to examining your goals, conducting some research, and working with a financial professional, you can learn how to manage risk in your portfolio by choosing appropriate investments.
1 Asset allocation does not assure a profit or protect against a loss.
2 Investing in stocks involves risks, including loss of principal.
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