Risk in an investment portfolio is a complicated facet. It's a necessary evil in order to get better rates of return, but too much risk makes those same investments a potential hazard to your finances. So, how can you use risk wisely no matter where you are in life? Here are five times when you should adjust your level of risk either up or down.
1. Adjust Retirement Risk as You Age. Your retirement portfolio should generally reflect an inverse relationship between risk and age. As your age goes up — and you are nearer retirement — your risk tolerance should generally go down. This is because the closer you get to taking out that money and depending on it, the less you should risk big losses.
2. Adjust Risk to Balance Your Portfolio. Do you want to take on an investment that you know carries a higher risk? This could be anything from an unproven sector of the market to investing in your brother's startup idea. But if you do raise your risk level in one area, offset it by lowering the risk in another way. For instance, you might buy more stocks in large cap companies that are less exciting but more stable.
3. Adjust Risk When You Rely on the Money. How much do you need to rely on a source of income or savings? If you depend on it, you should generally opt for more stable investments. Saving up the down payment for a home? High-risk investments might look good on paper for their high rate of return, but big losses could put your home purchase in jeopardy.
4. Adjust Risk As You Gain Experience. New investors tend to either risk too much or not take enough risk, depending on their personalities. If you entered the market warily but have learned how to gauge investments and craft a diversified portfolio, it may be time to get outside your comfort zone. On the other hand, you may start out taking huge gambles but have learned how to temper your enthusiasm. Use this experience to build a better portfolio.
5. Adjust Risk to Boost Savings. Not reaching your savings goals? Your immediate response might be to try to plow more money into investments, but raising your risk tolerance could be a better, long-term solution — particularly for anyone on a budget. Make your money work for you by seeking better returns.
Clearly, risk-taking within investments is a delicate balancing act. Your best source of guidance in finding the right mix is an experienced investment advisor. Make an appointment today to evaluate whether you need to adjust your risk up or down to achieve your goals.Share