Often times I hear people say "I'm conservative." Sometimes thats the truth and sometimes thats further from the truth. I had someone recently tell me they were conservative. After looking at their holdings I realized they weren't. Their entire portfolio was the S&P 500 index...which consists of all equity.
So lets start this off right and lets figure out your risk tolerance. These aren't an exhaustive list of questions, but these questions are a good start. So questions you'll want to answer for yourself are the following:
- How much investment risk are you willing to accept?
- How important is it for your investments to keep up with inflation (the general rise in the cost of living?)
- How large a decline in your account's value would you be willing to accept in any one year period?
- How much turbulence can you handle in your account?
- How many years do you have until retirement?
Generally the more risk you're willing to take the more aggressive you can invest your portfolio. However, if you have no time until retirement you can't actually be that aggressive. Even if you're pegged at aggressive, but you're already in retirement the most aggressive you should be is moderately invested - typically a 60/40 portfolio. 60% in equities and 40 in fixed income. As your risk tolerance goes up your portion invested in equities should generally go up too. Typically the maximum you'll want invested in the market for your portfolio is about 85%. Again, everyone is going to be different based on their needs. This post is a general guideline and not an absolute rule. The best thing to do is have a financial advisor help you review your portfolio and have them compare it versus your risk tolerance. Until next time!