Portfolio managers commonly reallocate accounts by shifting investments based on both technical and fundamental indicators and retirement timelines. They do this throughout the year in an effort to find a prudent balance of safety and growth.
But, a fresh year also offers inspiration to analyze your emotional resources and distribute them appropriately as well.
If you haven’t taken a risk tolerance test in a while, now would be a good time to do that. Any investor’s ability to withstand market volatility can be affected by many variables including age, income level, budget, retirement timeline, personality and family situation.
A person confident in his or her ability to absorb risk might view a steep market decline as a buying opportunity and a necessary correction of a healthy market, while another person might look at the exact same numbers and want to flee the equity market entirely in favor of cash and/or treasuries.
The financial conundrum we all face is that both reactions could be correct. The age old admonishment to sell down to your sleeping point means a different alarm clock for every investor. Nervous investors with a strict retirement timetable tend to choose the slickest clock with the loudest alarm, while those who have a looser timeline and a mellower attitude might even sleep in.
The point is, you have to ask yourself what type of investor you are. If volatility keeps you up at night and you’re willing to forego growth opportunities to lessen the likelihood of losing money, you may want to stick to cash or bonds. (Of course, with that choice you face another kind of risk, inflation, in which you could end up losing value in your accounts because they aren’t earning enough to keep up with the cost of living.)
Once you’ve analyzed your emotional resources and adjusted your investment strategy accordingly, you can avoid unnecessary headline-driven panics and you may even find your sleeping level is less sensitive than you might think.
If you or anyone you know has any questions about how to analyze risk tolerance, please call the office.