The amount of risk that you are willing to take in your portfolio can have a significant impact on your ability to reach your goals. Risk tolerance is a hot topic when it comes to portfolio design when working with a financial advisor. It’s important to understand risk and what the consequences of choosing a particular risk tolerance.
A Measure of Risk
Nobody wants to lose money, but there is a correlation between risk and return. The more risk you take, the higher the potential return and also potential loss. One of the keys to your success when it comes to investing conservatively or not is your education and understanding of the numbers. There are a few components to helping you understand how much risk may be acceptable.
- The rate of savings or how much you will save each year towards your goal. The more you save and the more often you do it will help to improve your chances of achieving your financial goal.
- Tax bracket: Taxes will have an impact on your investing portfolio whether it’s tax on contributions to a Roth IRA or taxes on distributions from an IRA you’ll face taxes more or less somewhere along the line.
- Time to Goal: The time frame to your retirement, college education planning or any other goal will affect your ability to reach your goals. The longer you have to save, the better off. So starting as early as possible can help.
- Risk Tolerance: The amount of risk you are willing to take with your investments.
- Goal: This is the number you will want to have for retirement, college education planning or any other financial goal.
Balancing out the points above can help to understand what it is you will need to do to reach your goals. Understanding these points may help you to see that investing too conservatively may require a considerable amount of savings. Or if you can’t save additional dollars and are still investing too conservatively then you may have to reduce your goal.
It’s not about investing too conservatively. It’s about understanding what it’s going to take to reach your goals. It’s about knowing that investing is a long-term process and should be well thought out and planned. It’s important to understand each piece of the puzzle to see the whole picture.