“If you take unacceptable risk, you have to be prepared to face the consequence.”- Carly Fiorina
The recent stock market drops are creating jitters for millions of investors. With concerns around rising interest rates, trade policies and higher inflation now is the time to analyze your investment risk. Risk can be defined as possibility of loss or injury. Regarding investing, risk can be defined as the chance an investment’s actual return will differ from the expected return. Risk includes the possibility of losing some or all of the original investment. Risk is also the potential to lose money permanently. Those statements regarding risk are enough to conjure the feeling that I could end up with less money than I started with and less than I need in the long-term. Although we know the definition and perils of risk, many retirees and pre-retirees are making the mistake of taking on too much investment risk.
One of the most basic principles of investing is to gradually reduce your risk as you get older, since retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to your stage in life. The solution to that dilemma is found in two strategies. I will discuss the first strategy today and the second strategy next week.
The first strategy is completing and following a Risk Profile Questionnaire (RPQ). Many investors have never completed a Risk Profile Questionnaire or if they have it was many years ago when they were younger, and they lived in a different investment environment. But why is completing a Risk Profile Questionnaire so important?
How you allocate your money among stocks, bonds, and short-term reserves may be the most important factor in determining the long-term return and volatility of your portfolio. The objective is to select funds only after you’ve determined the right asset allocation for your determined risk tolerance. A Risk Profile Questionnaire makes asset allocation suggestions based on information you enter about your investment objectives and experience, time horizon, risk tolerance, and financial situation. As your financial circumstances or goals change, it may be helpful to complete the questionnaire again and to reallocate the investments in your portfolio. The allocations provided are based on generally accepted investment principles. There is no guarantee, however, that any asset allocation or mix of funds will meet your investment objectives. All investments involve risks, and fluctuations in the financial markets and other factors may cause declines in the value of your account. You should carefully consider all options before investing.
The RPQ is designed to help you understand your risk tolerance. The RPQ asks you questions that provide some indication of the risk tolerance for a typical investor displaying your personal investment characteristics (concerning investment and/ or insurance products). It may not match your actual attitude toward investment risk, but it indicates the profile you fit into.
Now more than ever, it is imperative that you know how much investment risk you can and are willing to tolerate. The RPQ helps you to be proactive to stock market risk not just reactive.
If you are concerned about the recent stock market drop feel free to call our office to schedule a time to meet under our no-obligation, no-cost Risk Analysis strategy session.