VOL. 129 | NO. 148 | Thursday, July 31, 2014
Rays of Wisdom
Dana and Ray Brandon
What’s Your Investment Risk Profile?
Ray’s Take Risk. It’s something we are all involved in every day – sometimes consciously and sometimes not.
Just walking out the door of our homes and driving our cars involves a level of risk we don’t think about. We just assume we will arrive at our destination in good shape. There’s our daily subconscious risk.
How about conscious risk? How much are you comfortable with having in your life? Does the thought of going to Tunica and gambling make your heart race in a good way or a negative way?
Risk tolerance is just what it sounds like – a measure of how much risk you can handle as an investor. There are a number of types of risk. You can go broke simply due to inflation.
When it comes to building a solid and comprehensive financial plan, it’s critical to get a sense of your tolerance for risk. We have no way of knowing what’s coming, as shown by the financial crash of 2008. Long-term averages mean nothing if you can’t be committed for that long term.
If we want to have that comfortable retirement, we have to factor in risk. In addition to the risk that you can accept financially, risk tolerance also includes how you feel, personally, about taking risks and losing money. Always consider adjusting your risk tolerance based on your personal response to risk. A successful portfolio mix is one that you can live on and live with.
No matter how you slice it, risk is unavoidable. Keep in mind that your risk tolerance may change as your time horizon changes. Take as much risk as you need to achieve your goals, and no more.
Dana’s Take One pearl of wisdom I recall from finance class is, “The higher the risk, the higher the variability of the return.” Our sage professor impressed upon his students that greater risk did not insure greater returns, only a greater swing of volatility in the return – a risky business if you will. More risk meant winning big, losing big or falling anywhere in between; there’s not much comfort in that.
Seeking balance is a good thing for your personal health and financial health, too. A trusted physician can help keep your health in balance – cut back on the fast food and add more exercise. A good financial adviser will discuss risk, balancing your range of comfort with the required amount of risk to achieve your goals. Make sure you’re truly comfortable with the level of risk so that there are no big surprises later.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at firstname.lastname@example.org.