Wednesday, March 20, 2013

Comfortable investing – investment risk levels and you

The market goes up and down and so does your stress level. Are you uncomfortable with your investments or confident their value will be there when you need it? Investing for the future can be tricky. There are so many things to consider, including how much investment risk - the potential for your portfolio to decline in value over the short term - you’re comfortable with.

To help you get a solid read on what’s right for you, here are some tips for separating facts from feeling to create a comfortable portfolio that works.

Take your time to make the right decisions based on your personal risk level.  Carefully assess the investments from which your portfolio will be constructed. If you are uncomfortable with risk, focus on capital preservation and income generation in a portfolio comprised mainly of the more stable fixed-income type investments. As your capacity for risk increases, add equities for a potentially higher rate of return and potentially higher volatility.

Determine your personal capacity for investment risk
Ask yourself fact-based questions like this:
  • What is my investment timeframe? If it’s less than four years, don’t invest in higher risk assets. If you have an investment horizon beyond ten years, experts believe that you should invest in a more aggressive portfolio because historical trends show that, over the long term, you will benefit from a higher rate of return with ample time to recover from short-term volatility.
Ask yourself feeling-based questions like this:
  • Can I sleep soundly at night? Regardless of your investment horizon, the way you feel in the short term when the markets go through a severe decline will not change. Feeling-based questions should serve as a tool to prepare you for what you should expect and focus your logic and emotions to identify a consistent pattern of how you perceive investment risk and what you are realistically capable of withstanding.
The biggest mistake investors make is to overstate their comfort level with risk because that often leads to abandoning their investment strategy at the first sign of volatility. When you choose the right strategy from the start and stick with it, you will be rewarded over the long term. Of course, you should revisit your portfolio and investment strategy as conditions and your financial and life goals change to keep it in tune with you.

With so many different types of investment products, different asset classes, different industries and countries, determining the right strategy can be daunting. Get help from your professional advisor and ask them if they can provide you with an investment questionnaire, which is a great tool for identifying your personal risk level and creating a framework for constructing a sound, well-diversified strategy for you.

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