Have you ever wondered if there was a better way to evaluate risk?
Risk is one of the most important aspects of successful long-term investing, and it can be challenging to get it right.
You’ve probably taken too much risk at some point. Some investors assume that they have to take substantial risks in order to build wealth, so they’ll try to gain too much from a single investment or make big bets on a few individual stocks.
These investors can end up out of the market entirely after a sharp sell-off, however, and they typically buy back in at higher prices.
You may also know what it feels like to take too little risk and miss out on strong gains. If you steered clear of stocks after the 2007-2009 bear market, you forfeited years of terrific returns.
You may need to take some risk if you hope to maintain your quality of life in retirement and also leave something for your children, but how much risk is ‘right’ for you?
A true assessment of risk should answer these three essential questions:
1. How much risk can you tolerate?
2. How much risk do you need to take in order to reach your goals?
3. Are you invested in a way that’s consistent with your risk tolerance and your goals?
Many investors answer these questions generally: they think of themselves as conservative investors, so they invest primarily in bonds, for instance. They may not recognize that their bond portfolio may pose significant risks, including the risk that they may not generate enough of a return to meet their investment goals.
Today, there’s new technology and decades of data that can give you a more detailed analysis of risk and help you come up with more accurate answers to these important questions. These tools have helped investors reassess their true tolerance for risk and learn how they can change their portfolios to be more consistent with their risks and goals.
A Case Study: Too Much Risk
We recently spoke with a woman who thought of herself as an aggressive investor. She was an experienced investor, so she figured she understood the risks she was taking. She owned mostly diversified stock funds, but she also liked to make bets on individual stocks. She’d bought a couple of very low-priced stocks that she thought could really pay off over time.
She knew these beaten-down stocks were risky, but she didn’t have a lot invested in them. Plus she had a high tolerance for risk and she was decades away from retirement, so she had time to recover from potential losses.
When we took a closer look at how her stocks and funds had historically performed together, however, it was clear that her stock positions made her overall portfolio significantly riskier than she’d assumed. They increased the probability that her portfolio would experience significant losses, at least in the short term, and they pushed her portfolio out of her comfort zone.
With this knowledge, she has decided to make a change. She’s selling her individual stocks in favor of stock funds. She still has an aggressive portfolio that has the potential to help her accumulate enough wealth for her eventual retirement, but these changes seek to bring the risk of her portfolio down so that it’s more in line with her true risk tolerance.
How to Find Your Comfort Zone
FundX portfolio managers can help you assess your risk tolerance and see if your current investments are compatible with your risk and your goals.
Call us at 1-800-763-8639 to get started. It doesn't take long, and it can help you invest wisely and with confidence.