Some Risk Factors to Keep in Mind When Designing Your Investment Portfolio

Posted by rpicon on Sep 1, 2010 in Investor Education | Comments Off

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.