The combination of declining home values, a banking crisis, and turbulent financial markets made 2008 a year that investors wonâ€™t soon forget. In the midst of unsettled financial markets, many equity investors faced decisions about how to position their portfolios for the future.
During volatile financial times, it is only natural to reconsider your own personal risk tolerance and review the role of risk in your portfolio. These guidelines can help you determine the amount of portfolio risk that is appropriate for your situation.
Choose Appropriate Vehicles
Many debt instruments, such as investment-grade corporate bonds, government bonds, and certain types of short-term debt, are typically considered more conservative than stocks, with some exceptions. Itâ€™s important to note that, even though investments that offer potentially higher returns generally carry higher risks, the opposite is not necessarily true. Just because something is risky doesnâ€™t mean it has a higher return potential. For this reason, it is critical to consider exactly what risks an investment poses in order to determine whether you are exposing yourself to unnecessary risks. The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
Consider Your Time Horizon
Some investors are risk-averse because losses could potentially affect their current incomes. Although most people will need to continue pursuing stock market returns well into their retirement years, even if only on a limited basis, itâ€™s wise to reduce your exposure to riskier investments as you get closer to retirement and especially after you retire. Individuals who are expecting to retire in three to five years may want to begin shifting assets to more conservative investment vehicles in order to avoid losses from which they may not have time to recover.
Review Personal Preferences
Finally, remember that your own personal risk tolerance can change over time. If you have become anxious about recent losses and/or the potential for future losses, you may want to rebalance your portfolio away from higher-risk investments. However, such a move should be considered carefully, in light of the fact that you may be increasing the risk that you will not achieve your financial goals.
If your risk tolerance has shifted, it may be time to revisit the role of risk in your portfolio. We can help you review your investment strategy in light of your current situation.