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

NOW HIRING: Five Valley job fairs this week, hundreds of open positions

If you are currently out of the workforce or looking for a new job, there are hundreds of employers looking for workers in the Valley.  HPOne …

Published: August 28, 2016 - 12:55 pm @ http://www.abc15.com/money/now-hiring-five-valley-…

Do You Know Why Mint Is So Healthy? Find Out!

advertisement Find more information on Dr. Weil and integrative medicine. DrWeil.com The premiere resource for in-depth, timely, trustworthy i…

Published: August 28, 2016 - 12:24 pm @ http://www.drweilblog.com/home/2016/8/28/do-you-kn…

9 Things to Do Labor Day Weekend 2016 in Metro Phoenix

Lauren Cusimano A A It’s the end of summer. It’s best not to fight it, but it may be a good idea to rage on those final days of freedom: Labor…

Published: August 28, 2016 - 11:59 am @ http://www.phoenixnewtimes.com/arts/9-things-to-do…

Record tourism in national parks comes with increasing threats

On the edge of a meadow in Yellowstone national park, tourist John Gleason crept through the grass, four small children close behind, inching …

Published: August 28, 2016 - 11:59 am @ https://www.theguardian.com/environment/2016/aug/2…

Starbucks Brings Job-Training Program to Phoenix to Re-Engage 'Disconnected Youth'

Griselda Nevarez A A Social scientists have a term for young people between the ages of 16 and 24 who aren't in school and don't have jobs: di…

Published: August 28, 2016 - 11:53 am @ http://www.phoenixnewtimes.com/news/starbucks-brin…

Fido Bag used to save cat after Mesa apartment fire

MESA, AZ - The Mesa Fire Department used a Fido Bag Sunday morning to help save a cat pulled from an apartment fire near the US 60 and Extensi…

Published: August 28, 2016 - 11:35 am @ http://www.abc15.com/news/region-southeast-valley/…

Opponents of marijuana legalization initiative take their case to the Arizona Supreme Court

PHOENIX - Opponents of an initiative that would legalize recreational marijuana in Arizona urged the Arizona Supreme Court Thursday to overtur…

Published: August 28, 2016 - 10:54 am @ http://www.abc15.com/news/state/opponents-of-marij…

Left Hand Brewing’s Oktoberfest Returns

Time to raise your stein and celebrate the change of the season and the change in seasonal craft beer styles. As the summer days come to an en…

Published: August 28, 2016 - 9:57 am @ http://www.wearebrewstuds.com/stories/news/craft-b…

Don’t Privatize National Parks

The centennial of the National Park Service is inspiring an impressive amount of soul-searching about the agency and the lands for which it is…

Published: August 28, 2016 - 9:57 am @ https://newrepublic.com/article/136307/dont-privat…

Reports shows Arizona children continue to fare poorly

PHOENIX — Arizona children aren’t doing much better than they were last year. That’s the conclusion of the 2016 Arizona Kids Count Data Book. …

Published: August 28, 2016 - 9:52 am @ http://ktar.com/story/1237242/report-findings-show…

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…