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Does Your Investment Strategy Match Your Tolerance for Risk? It Should.

| November 09, 2015
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Investing is a tricky concept for most Americans. In essence, you are trusting your money to variables you have no control over, and hoping it will work out for you in the long run with beneficial returns that allow you to retire comfortably. One of the first questions a financial advisor should ask you focuses on your tolerance for risk. Will you freak out if you see your funds dip due to lulls in the market, or can you tolerate the ups and downs while focusing on long-term growth?

 

Investment Involves Risk

It's imperative that all investors realize there is a risk to investing. Whether you invest in aggressive funds or conservative funds, there is always going to be a chance for the funds to dip. Sometimes these dips are short lived. For example, if your funds are heavily invested in oils, the ebb and flow of oil prices can lead your funds to shoot high and dip low in as little as a few weeks. Other times, dips last longer. You need look no further than the real-estate bubble bursting in 2007, and the subsequent Great Recession from which Americans are still recovering.

 

Everyone has a different tolerance for risk when investing, and this should be assessed before your wealth is allocated into different accounts.

 

Determine Your Risk

How do you determine your personal tolerance for risk in investing? Before you invest a dime, determine your risk tolerance by thinking about the following factors:

  • What's your next major expenditure? Do you plan to buy a home or new vehicle in the next year? Do you have no major expenditures visible on the horizon?
  • Time range for investing: Think about when you're going to need the money you are accumulating through current investments.
  • Annual income: What do you expect to make from your job during the next several years?
  • Reactions: What will you do if your investment or one of your investments loses a significant portion of its value early on?

 

Balance Your Portfolio

The best way to avoid disruptive ebbs and flows in your investments is to diversify and balance your investments across your larger portfolio. For example, if the majority of your money is in a narrow range of funds, it is more susceptible to dramatic drops in value if the market struggles. Owning a variety of stocks across different sectors helps to spread the risk by avoiding a tight focus on one industry or niche.

 

It's also important to rebalance your portfolio over time. While certain sectors of an economy are reliable on a long-term basis, others are not. Similarly, as you near your goal of retirement, the risk of certain sectors (while worthwhile early on) poses a threat to your retirement funds as you get close to that date.

 

Lastly, keep in mind that the amount of time you have to invest can factor into your investment strategy. If you're investing in your youth, you have a longer period of time to invest, and you can accept more risk because there is the potential for long-term growth to wipe out early or short-term losses. Additionally, investing early increases the potential return. Contact Richard L. Farrar, CFP®, CLU®, ChFC®, AEP, today for more help assessing your risk and finding the best portfolio options for you.

These are the views of Social Advisors, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Richard L Farrar is a registered representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-1344087-110315

 

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