Do Your Investments Match Your Risk Tolerance?
When was the last time you looked at the content of your portfolio?
When turbulence hits Wall Street, are you stressed out? If you have taken on too much risk in your portfolio - which can happen through intention or inattention - stock market volatility may make you anxious. So from time to time, it is a good idea to review how your assets are invested. Your asset allocation should correspond to your tolerance for risk, and if it doesn’t, it should be adjusted.
A balanced portfolio may help you come out of stock market dips in better shape. Stocks and stock funds aren’t the only investment classes you can choose from, and you won’t be alone if you decide to examine other investment options.
Treasuries, bonds and bond funds become attractive to investors when Wall Street turns especially volatile. Certain forms of alternative investments gain attention as well, particularly those with low or no correlation to the equities markets. Bonds tend to maintain their strength when stocks perform poorly. Some cautious investors maintain a cash position in all stock market climates, even raging bull markets.
Downside risk can particularly sting investors who have devoted too much of their portfolios to momentum/expensive stocks. A stock with a price-earnings ratio above 20 may be particularly susceptible to downside risk.1
Underdiversification risk can also prove to be an Achilles heel. Some portfolios contain just a few stocks - in the classic example, someone has invested too heavily in company stock and a few perceived "winners." If a large chunk of the portfolio’s assets are devoted to five or six stocks, the portfolio’s value may be impacted if shares of even one of those companies plummet. This is why it is wise to own a variety of stocks across different sectors. The same principle applies to stock funds. If the S&P 500 corrects (that is, drops 10% or more in a short interval), the possibility grows that an aggressive growth mutual fund may dive.1
Are you retired, or retiring? If you are, this is all the more reason to review and possibly even revise your portfolio. Frequently, people approach or enter retirement with portfolios that haven’t been reviewed in years. The asset allocation that seemed wise ten years ago may be foolhardy today.
Many people in their fifties and sixties do need to accumulate more money for retirement; you may be one of them. That sentiment should not lead you to accept extreme risk in your portfolio. You’ll likely want consistent income and growth in the absence of a salary, however, and therein lies the appeal of a balanced investment approach designed to manage risk while encouraging an adequate return.
Why not take a look into your portfolio? Ask a financial advisor to assist you. You may find that you have a mix of investments that matches your risk tolerance. Or, your portfolio may need minor or major adjustments. The right balance may help you insulate your assets to a greater degree when stock market turbulence occurs.
Citations.
1 - fc.standardandpoors.com/sites/client/wfs2/wfs/article.vm?topic=6064&siteContent=8339 [5/5/14]
