Risk Tolerance = what is your “stomach factor?” If the stock market drops 20%, would you cut your losses and move on? Would you buy more? You need to be honest with yourself in determining how comfortable you are with fluctuations in your account.
Risk Need = if your goal is to reach a certain dollar amount by a certain time frame, you may NEED (as opposed to WANT) to take on more risk than you are comfortable doing. For example, in a 529 College Savings Plan, if your goal is to reach $50,000 in 15 years, and you only invest $10,000, your investments need to earn 11.3% on average. Bonds will not earn this type of return over this amount of time. As a result, an Investment Policy with a heavy portion allocated to stocks may be appropriate.
Risk Capacity = If you have a high degree of job security, a high income, and many years before you need to withdraw income from your savings, you have a high capacity to take on financial risks. If you have a low degree of job security, low income sources, and a shorter time frame, then you have a low risk capacity to take on financial risks.
These risk factors, combined with time horizon to meet your goal, will help you determine an appropriate asset allocation for your investment plan. If you are unsure if you are properly structuring your portfolio, contact us at 1-800-808-7488 for a Free Portfolio Review or contact your financial advisor to make sure you are on track to meet your goals in a way that you understand and are comfortable doing.
Many people try to outsmart the markets. If you read books like those shown in the table below, it can be easy to let your emotions take over. Following emotions (greed or fear) is almost always a sure path to failure when making financial decisions. Even if you get it right by “selling before a crash”, you have to get it right again by buying before it goes up. Rather than try to predict or anticipate the future, create an investment plan within the context of a long-term financial plan. Outline your asset allocation and create rebalancing parameters in an Investment Policy Statement (IPS). That way you can stick to a disciplined investment strategy and avoid making costly emotional decisions with your money. If you are not handling your investments this way, consider interviewing with a financial advisor.
| Year | Book Title | What happened while these books were being read |
| 1999-2000 | Dow 36,000Dow 40,000: Strategies for Profiting From the Greatest Bull Market in History.” | The Dow Industrial Average peaked at 11,722 Jan. 14, 2000 and declined 45% over the next three years. |
| 2003-2007 | Conquer the CrashWhy Stock Markets Crash
Blind Faith: Our Misplaced Trust in the Stock Market and Smarter, Safer Ways to Invest |
The Dow Industrial Average nearly doubled to over 14,000. |
| 2005-2008 | Two Years to a Million in Real EstateConfessions of a Real Estate Entrepreneur: What it Takes to Win in High-Stakes Commercial Real Estate | The “subprime mortgage” crisis began. Eventually, the stock market (as measured by the S&P 500) crashed nearly 40% in 2008. |
| 2009-2010 | After ShcokCrashproof 2.0
Meltdown The Collapse of the Dollar and How to Profit- Make a Fortune by Investing in Gold and other Hard Assets |
Gold is near an all-time high. The stock market has recovered by 60% from its lows in March 2009. |
Why ETFs?
Retail mutual funds are outdated and expensive. Watch this video explanation to learn more about Exchange Traded Funds (ETFs) and why they are the “building blocks” of the portfolio of the future. Some of the benefits of ETFs include diversification, liquidity, tax efficiency, and transparency. They are growing rapidly as an investment vehicle. http://www.exploringetfs.com/?ut=fp
ETF Definition
An ETF is an investment vehicle that combines key features of traditional mutual funds and individual stocks. ETFs are open-ended funds which like index mutual funds represent portfolios of securities that track specific indexes. A distinct difference is that ETFs trade like stocks and can be bought and sold (long or short) on an exchange and can employ the same trading strategies used with stocks.
Creation & Redemption
ETF shares are created differently than traditional shares of stocks. Traditionally a company issues a set number of shares through an initial public offering (IPO) and then the shares are traded in the secondary market. Volume is an indication of how many shares are available at a given price. ETF shares can essentially provide unlimited liquidity through a process called creation and redemption. ETF shares can be created on-demand by Authorized Participants such as institutional trading desks and other approved market makers. They are released directly into the secondary market. ETF volume is an indication of how many shares have already traded, not how many shares could be traded.
Alternative to Mutual Funds
ETFs are an alternative to traditional mutual funds, with expense ratios that are typically 90% cheaper than actively managed mutual funds. They’re often cheaper than index mutual funds, too. While ETF transactions will most likely generate brokerage commissions, their lower expenses may offset those transaction costs for long-term investors.
Since most ETFs track indexes which are comprised of a basket of securities, they inherently provide instant diversification and are expected to reduce capital gains distributions through lower portfolio turnover than actively managed funds. Unlike traditional mutual funds where shareholder activity can contribute to capital gains distributions, an ETF’s creation and redemption structure eliminates the impact of shareholder activity on capital gains distributions thereby making them more tax efficient. Of course, if you sell a ETF at a gain, normal tax rules apply.