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Do You Look Before You Leap? Comments

Find out how risk-averse or tolerant you are and how to use it to your advantage

  • By Jocelyn Black Hodes, DailyWorth's Resident Financial Advisor
  • May 30, 2013

 

The Right Mix of Risk

If hearing that the Dow lost 200 points one day causes you (or your partner) to want to sell all shares of stock immediately, you might be better off with a more moderate investment mix that includes less volatile, more predictable returns like bonds and bond funds. If you have a short-term investing window, you should have the majority of your money in fixed-income investments if you want minimal risk.

If you're adventurous by nature or already financially secure and have at least 10 years to meet your goals, then you may be comfortable allocating the majority of your assets to a diversified portfolio of stocks and stock funds that have the potential to provide the strongest returns over the long run, despite the likelihood of significant losses along the way.

Keep in mind that labels can be deceiving and being an “aggressive” or “conservative” investor doesn’t necessarily mean being one extreme or the other. A conservative portfolio can still lose value and an aggressive portfolio might not be as risky as you might think if it is well-diversified. You can also have a portfolio of mostly income-producing defensive stocks that could be labeled as “conservative” or a portfolio of high-yield and foreign bonds that could be considered aggressive. So don’t assume you are invested the way you want to be without understanding each individual investment you own and why.

If you are married or in a serious relationship and investing for a joint goal, you and your significant other should each determine your risk profiles. If they do not match, it may be in the best interest of your relationship to go with a more conservative asset allocation. Remember: most investors are more concerned about losing money than chasing the best returns. So, when in doubt, lean more conservative and consider dedicating at least half of your portfolio to less risky investments.

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