Risk Tolerance
What is Risk tolerance? "The worst possible decisions are made when someone is panicking!" In the case of investing it usually means you are selling off your investment, at exactly the wrong time! That is the kind of action creates REAL losses. Right up to the moment you sell, your loss is only on paper. Financial Planners test their clients risk tolerance with various means. This gives the Advisor an idea of how you will react to Stock Market volatility or to a Stock Market correction and allows the advisor to assemble a portfolio that takes that risk tolerance in to account. Everyone has a high risk tolerance, when the market is roaring upward, it’s how you react to a downturn that you need to understand. If your primary goal, when invest is "no loss -- ever", do not invest. You are a saver not an investor. It is essential you understand the difference between those two. I like to ask a client how they would feel if they gave me $100 to invest and by the following week the $100 was now valued at $80. I listen for this answer. “No big deal, so what it’s only $20!” What if that was a $100,000? Sometimes I still hear “no big deal, part of the market, it will come back.” These are people with a good risk tolerance for investing. Risk is the chance that some action you take will not have a positive outcome. Walking across the street has risk. You could be hit by a car, or bus, or truck. Yet every day billions of people cross a street with no problem. That doesn’t mean there is no risk. It just means that the fear of that risk is suppressed enough for people to cross the street without even thinking about it. It’s not risk that stops people, it’s the fear of that risk that can stop you cold. Fear is our most basic emotion, it rears up whenever we are faced with the unknown. Understanding, knowledge reduces fear of risk. Fear of risk can cost you more then the risk itself. The greatest market risk is not being in the market. If fear of market risk is holding you back. There is a simple strategy to eliminate the risk of losing your initial investment. 3 rules that must-be-followed to guarantee no loss to your original investment.
If you follow these 3 rules. The worst possible outcome you face -- is getting all your original money back! Another huge risk is not beating inflation with your investments. Having all you cash tucked away in GICs creates guaranteed losses each year. Yes, the losses are small, but guaranteed, continuous and real. What is the greatest Risk People face during retirement?--- Running out of money!That’s the biggest risk of all, not losing in the stock market! Inflation--the culprit that takes your wealth, if you let it. Inflation risk, is very real. Luckily your government benefits are indexed to inflation, eliminating the inflation risk, but your investment account can only fight inflation one way by out growing inflation. This can’t be done with fixed income investments. The only way to beat inflation is with equity type investments. You have to have enough equity investment in your portfolio to allow it to generate your targeted average rate of return to beat inflation. Inflation can devastate a retirement account if you are holding the wrong investments to fight it. It’s a tough subject to get your head around. You need to understand inflation is an income killer and you must take steps to out perform it by understanding your risk tolerance and working with it in a balance diversified portfolio of investments. Return from Risk Tolerance to Financial Planner 
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232 Return from Risk Tolerance to Home Page
|
