How should your risk tolerance influence investment decisions? - Ahwatukee Foothills News: Money

default avatar
Welcome to the site! Login or Signup below.
|
||
Logout|My Dashboard

How should your risk tolerance influence investment decisions?

Print
Font Size:
Default font size
Larger font size

Related Stories

Posted: Thursday, October 17, 2013 8:45 am

As an investor, how much risk can you tolerate? It’s an important question — because the answer can help you make the right investment choices.

Before you know your risk tolerance, you’ll want to make sure you first understand the nature of investment risk — the risk of losing principal. This risk is especially prevalent when you invest in stocks, because stock prices will always fluctuate — and there are never any guarantees about performance. Of course, a decline in value does not mean you need to sell; you can always hold on to the stock with the hope that its value will bounce back. And this can certainly happen, but again — no guarantees.

How you respond to this type of investment risk will tell you a great deal about your own risk tolerance. Of course, no one, whether he or she has a high tolerance for risk or a low one, particularly likes to see declines. But people do react differently. If you’re the sort of person who can retain your confidence in your investment mix and can focus on the long term and the potential for a recovery, you may well have a higher tolerance for risk. But if you find yourself losing sleep over your losses (even if, at this point, they’re just “paper” losses), becoming despondent about reaching your goals, and questioning whether you should be investing at all, then you may have a low tolerance for risk.

This self-knowledge of your own risk tolerance should help inform your investment decisions — to a point.

Even if you determine you have a high tolerance for risk, you almost certainly should not load up your portfolio exclusively with stocks. If the stock market enters a prolonged slump, you could face heavy losses that may take many years to overcome, causing you to lose significant ground in the pursuit of your financial goals. Conversely, even if you discover you don’t have much tolerance for risk, you won’t want to invest only in supposedly “safe” vehicles, such as certificates of deposit (CDs). During those periods when rates on CDs and similar instruments are low, as has been the case in recent years, your interest payments from these investments may not even keep up with inflation — meaning that, over time, you could end up losing purchasing power, which, over the long term, can be just as big a risk as market declines.

Ultimately, then, you’ll probably want to let your risk tolerance guide your investment choices — but not dictate them with an “iron hand.” So, if you believe you are highly tolerant of risk, you might have a somewhat higher percentage of stocks in your portfolio than if you felt yourself to be highly risk-averse — but in any case, you’ll likely benefit from building a diversified portfolio containing stocks, bonds, government securities, CDs and other investments. While this type of diversification can’t guarantee profits or protect against loss, it can help reduce the effects of volatility on your portfolio.

By knowing your own risk tolerance, and the role it can play in your choices, you can help yourself create an effective, suitable investment strategy — one that you can live with for a long time and that can help you avoid the biggest risk of all: not reaching your long-term goals.

• This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Joseph B. Ortiz, AAMS, CRPS. Reach him at (480) 753-7664 or joseph.ortiz@edwardjones.com. Accredited Asset Management Specialist and AAMS, Chartered Retirement Plans Specialist and CRPS are registered service marks of the College for Financial Planning.

More about

More about

More about

  • Discuss

Phoenix police: Shooting outside of QuikTrip kills one person

PHOENIX - Police are investigating a shooting that happened outside of a QuikTrip store that seriously injured one person. 

Published: September 29, 2016 - 10:18 pm @ http://www.abc15.com/news/region-phoenix-metro/wes…

Phoenix demands Trump campaign drop ad using city's uniformed cops

Phoenix officials, infuriated over an ad for Donald Trump's presidential campaign that includes city cops, fired off a letter Thursday demandi…

Published: September 29, 2016 - 9:57 pm @ http://www.nbcnews.com/politics/2016-election/phoe…

USA Today Takes A Side In The Presidential Race For The First Time

USA Today, for the first time in its 36-year history, is taking a side in a presidential race, urging readers to vote against Donald Trump. Th…

Published: September 29, 2016 - 8:49 pm @ http://www.huffingtonpost.com/entry/usa-today-endo…

Nevada Solar Advocates Laud Task-Force Recommendations

In focus on our nationwide rundown; former rivals Sanders and Clinton team up on college debt; a new poll shows cancer research is a priority …

Published: September 29, 2016 - 8:50 pm @ http://www.publicnewsservice.org/2016-09-29/consum…

Peoria Police Department - Arizona - Timeline

See more of Peoria Police Department - Arizona by logging into FacebookMessage this Page, learn about upcoming events and more. If you don't h…

Published: September 29, 2016 - 6:54 pm @ https://www.facebook.com/PeoriaPoliceDepartmentAri…

Arizona Republic Endorses Hillary

Arizona Republic endorses Hillary — then abuses its subscribers. Via author and activist Mike Cernovich: The Arizona Republic broke a longstan…

Published: September 29, 2016 - 6:55 pm @ http://www.thegatewaypundit.com/2016/09/arizona-re…

11 Best Things to Do in Metro Phoenix This Weekend

Lauren Cusimano A A New Times picks the best things to do in metro Phoenix from Friday, September 30, through Sunday, October 2. For more, see…

Published: September 29, 2016 - 6:19 pm @ http://www.phoenixnewtimes.com/arts/11-best-things…

In the Era of Trump, Anti-Latino Hate Crimes Jumped 69% in L.A.

Dennis Romero A A Amid Republican presidential candidate Donald Trump's claims that Mexican immigrants are a criminal source of America's alle…

Published: September 29, 2016 - 5:48 pm @ http://www.laweekly.com/news/in-the-era-of-trump-a…

Newspaper Loses Subscribers, Receives Death Threat After Endorsing Hillary Clinton

The Arizona Republic lost subscribers and received a death threat after endorsing Democratic presidential nominee Hillary Clinton on Tuesday. …

Published: September 29, 2016 - 5:48 pm @ http://www.huffingtonpost.com/entry/arizona-republ…

Los Taquitos hosts proclamation honoring Hispanic-owned restaurants

Welcome to the site! Login or Signup below. Login|My Dashboard|Register Posted: Wednesday, September 28, 2016 4:30 pm | Updated: 10:42 am, Thu…

Published: September 29, 2016 - 5:48 pm @ http://www.ahwatukee.com/business/article_8b217068…

Facebook

ahwatukee.com on Facebook

Twitter

ahwatukee.com on Twitter

RSS

Subscribe to ahwatukee.com via RSS

RSS Feeds

Spacer4px

Most Popular

Online poll

Loading…