Retirement Investing And Risk Tolerance
Investing for retirement is the ultimate display of human patience and ability to overcome natural human instincts. This is because it is difficult for people to overcome their desire for instant gratification. In other words, it is a lot more fun to go spend some money at the mall than it is to save that money in an account for something that may seem like a long time away.
Those who do manage to get past their tendency for spending and do invest should know about a term called “risk tolerance”. This is the idea that one has a set amount of a gamble that they are willing to take with their investment dollars. Everyone has a level that they are comfortable with, but that level can vary wildly from one person to another. It is important in your planning that you know what your level is.
What Is The Appropriate Level For Me?
Determining your own tolerance for investment volatility is the first step to take when thinking about investing. You need to know this in order to select investments that are appropriate for your portfolio. Part of the equation to consider is your age and how far away retirement is for you.
Investopedia discusses this concept by saying that younger investors generally should have an appetite for more risk in their investments. This is the general theory because it is said that younger investors can take a hit to their account and still have plenty of time to regroup and get back those losses over time. They have the time horizon to be able to get back the money they may lose by taking on investments that are too risky.
The upside for a young investor to take on a risky investment is that it has the potential to pay off big. Sometimes the stocks of very small companies, for example, are a type of investment worth taking a look at. They could go bust and end up dropping to zero, but on the other hand, they could hit it out of the park and allow the investor to get a huge return on his or her money.
Planning Out Your Future
The age factor is not the only consideration to put into the equation. It is a good starting point, but one has to consider themselves as a person as well. What do you feel when your investments drop by say ten percent? Are you willing to hold on and wait for better times? Would you consider putting even more money into an investment that has become cheaper like this?
Some people can handle the ups and downs of the market just fine. They don’t even necessarily look at what the market is doing, they just focus on the long-term horizon that they have to consider for their investments. That is the type of person likely to do well in the market.
Trust Your Instincts
Instincts are a powerful thing. If you ever feel uncomfortable with a particular investment, it is probably best to avoid them altogether. If someone tries to sweet talk you into putting money into something that you are not interested in, they probably have only their own best interests at heart. You are the only person responsible for your financial situation, remember that when investing.
Less Risky Investments
Someone who has a lower level of tolerance for volatility might want to consider lower volatility investments. Socking some money away in low-volatility investments is not going to make a person fabulously rich, but it is going to help them feel a greater sense of security. That is just as important to some people to keep them going in this whole investing endeavor.
Before putting money into investments, think about getting out the pencil and paper to write some things out and try to figure out what your tolerance level is for volatility. That is perhaps the best homework you can do for yourself before you ever drop even a dollar into the market.
We plan for the road ahead with pre-retirees and retirees every day and understand that diversification, minimizing risk and not outliving your money are important objectives to many. We are here to review what plan you have in place now or to look at a plan for tomorrow.