Adrenaline junkies are a one of a kind. These are people who, even into their adulthood, you can count on to jump out of a plane without batting an eye, show up to work with broken bones, and take every weekend to seek out thrills. While many of us are somewhat envious of their adventures, at the end of the day, most of us like our bones intact. We may say we have a ‘healthy fear’.
Regardless of your natural inclination for risky behavior, there is always a healthy balance of risk and safety, even when looking at your finances. The right balance fluctuates with your age, financial income, and responsibility, among other factors.
Let’s take a look at a few of these factors and see when it’s best to play it safe and when it’s best to take a leap.
While higher risk does not always equal higher returns, it’s widely accepted that stocks offer greater return potential than bonds, or cash, over the long-term. When you are younger, you have a long-time horizon and want to use this fact to your advantage by having a high percentage of stocks in your investment portfolio. In this case, risk represents an opportunity for higher returns. As you get older, your time horizon shortens and the possibility of a significant loss impairing your ability to retire becomes a meaningful concern; thus, unnecessary risks can become financially devastating.
The right amount of risk for you will vary based on a number of factors, including your tolerance for risk, financial capacity for risk, age, and goals for financial freedom. As part of your Atomic Planning Summary Report, we list your target risk-level, which is the broad allocation between stocks and bonds in your portfolio that optimizes your ability to achieve and sustain your goals for financial freedom. The other number in your investment risk particle is the amount of risk currently being taken in your portfolio. Using this number, you can quickly see if you’re on target and even mentally approximate the amount of downside potential your portfolio could experience.
While the level of downside risk varies considerably at different stages of the market cycle, let’s assume a 50% possible downside risk for stocks. By taking the risk number in your investment risk particle (we’ll use 80% for our example) and multiplying it by the downside risk assumption, you can quickly estimate the potential downside risk for your portfolio. In our example, the portfolio has a potential downside of 40% (80% x 50%).
While your detailed investment report goes into substantially more detail, the Atomic Planning Summary Report provides a way to quickly approximate the level of risk in your portfolio, and see if you’re taking more or less risk than your target. Do you know what your risk number is? If you would like help determining your risk number. feel free to schedule a call; we’re here to help.