Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “how much risk should I take with my investments?” Imagine for a moment that you could play a game with an 80% chance of winning. You could play this game as many times as you wish. If I asked you to bet $20 on this game, where your $20 would double if you win or be gone if you lost, would you play? I certainly would. After all, the odds are favorable and it’s only $20. But would you play if the chance of losing meant you would lose your house? Only a 20% chance of losing, the odds are still in your favor. For many people, their decision to play the game would change if their house was on the line, even though the rules remained the same. This is an example of how risk affects our decision-making.
Analyzing Risk Tolerance
When it comes to investing, there are obviously risks. Stocks can rise or fall on any given day in the markets. The prospect of growth and watching our dollars compound over time is exciting. But when those dollars fall in a market downturn, we may question our desire for growth. Deciding how much risk to take with your investments usually starts with a comprehensive plan for how you’ll reach your financial goals. For example, someone that’s saving well and living within their means may not need significant growth to achieve their goals. In this case, the conversation moves to understand how much their investments may fluctuate if we have a 2008-level recession. While recessions as deep as the Great Recession of 2008 are rare, it’s important to discuss how someone would react in the event it happened again.
Discussing the prospect of growth is fun and exciting. Discussing the prospect of decline is not. However, ignoring the potential for market downturns leaves out an important element of investing. Once this conversation happens and someone’s tolerance for risk is revealed, they can confidently decide how to invest within their comprehensive plan. I’ve found that for some people, they’re less tolerant for risk than they assumed they were. For others, the idea of retiring earlier or having more income in retirement means they’re willing to adjust their expectations for risk and return.
Reach Out to Us
Either way, determining how much risk to take on with your investments requires a comprehensive plan, stress-testing your tolerance for downturns and committing to a long-term strategy for your portfolio. If you have a question about this topic or have a question for next month’s video, please send it to DTroyer@MonetaGroup.com.
Thanks for watching and we’ll see you next month.
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