From March 2008 to February 2009, a 100% stock portfolio lost over 43% of its value, and those with a 60% stock portfolio lost a quarter of their value (Source: Retirement Researcher, September 22, 2016).
Did you stick to your asset allocation during that time? Many didn’t, because they just couldn’t stand the extended volatility.
While that was a pretty extreme period of time, the fact of the matter is that your risk tolerance is one of the most important factors in investing. As you probably know, risk tolerance is the amount of risk you’re comfortable with taking when investing.
In your portfolio, stocks and bonds play different roles. Stocks are intended to drive the growth of your portfolio and bring the highest return; but without question, they are also riskier.
Bonds tend to be the stability of your portfolio. They may slow down your growth, but they’re more dependable and less risky. It is wise to have a combination of stocks and bonds to keep you on track to meet your financial goals. But the real question is, what ratio is right for you?
Think of a 10-point scale, with 10 being the riskiest and 1 being the least risky. You need to make sure you know where you fall on that scale.
For most of us, investing is about meeting long-term financial goals, so making your portfolio match your risk tolerance is key to staying disciplined. When you get your risk tolerance right, you are less likely to bail during market turmoil and should feel more secure with your asset allocation.
That’s not to say you should always keep your risk tolerance the same. It’s important to think about it at least annually to make sure you are still comfortable with it.
Please call to discuss this in more detail.