We take risks every day; driving, sharing personal information on the internet, participating in our favorite activities. We often do not even worry about the risk we take in these everyday activities, likely because we feel safe or have a high level of comfort with the experience of each activity.
Risk in many respects is a measure of our comfort with uncertainty. As we discussed last month, our comfort with taking risk often stems from experiences we have had and what we have been exposed to over the years. In order to have a sound financial plan aligned with your personal needs, it is imperative that you are risk aware of where your relationship with risk stems from. Whether you are comfortable seeking risk or more comfortable with a smooth and steady ride, your entire investment portfolio does not necessarily need to mirror your comfort level. There are other key factors that play into your comprehensive investment strategy.
One of the most significant factors is time horizon. The length of time until investment funds are needed for a particular goal is key when assessing risk. There are some goals like financial independence (retirement) that do not have one end date until money is needed for a goal but rather multiple dates. Investors who are comfortable with risk, may want to consider taking less risk with investment funds they need in the short term. Investors who are more risk averse, may want to take on more risk with investment funds earmarked for goals far into the future.
Another factor to consider is the impact of risk on determining savings levels for each goal. An investor taking on more risk, typically does not need to save as much money as an investor who is risk averse due to the potential additional gains that will help achieve that goal. This is important to note as this impacts lifestyle and how life is lived. It is also important to note, that just because one is willing to take on risk does not necessarily mean that they should, especially when it comes to short term goals.
Risk is present with all investments, even the most conservative investments, including cash. Being risk aware of your natural comfort with risk, recognizing the time horizons for each of your goals and understanding the different types of risk will support more informed decisions. Market risk is the inherent risk that investors take on when they invest. Market risk is the volatility that is often associated with stocks but can also be seen with bonds and other investments. This is not the only type of risk but yet the type of risk that investors focus most on. Several other types of risk exist when investing; credit risk, interest rate risk, inflation risk, currency risk, liquidity risk, country risk and sociopolitical risk.
Ultimately, there are many complexities to consider. Being risk aware is the first step. Partnering with a CERTIFIED FINANCIAL PLANNER to help navigate the different types of risk and build a strategic financial plan and investment strategy tailored to you is an important second step. Reviewing and understanding your strategy will help empower you to embrace the level of risk you are taking and reassure you when risk presents itself in the markets, economy and in your personal life. Center your investment strategy on what matters most to you.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services offered by Concentric Private Wealth®.
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Advisory services offered through Commonwealth Financial Network®, Registered Investment Advisor.
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