The intersectionality of your risk tolerance, return objectives, and what is necessary for you to experience the financial future you have in mind.
Investment risk can be defined in many ways including volatility, the probability or likelihood of occurrence of losses and standard deviation of return. Your individual investment risk tolerance is unique to you and can be measured by the answer to this question: How much loss on your investment portfolio are you willing to tolerate in a twelve-month period beyond which you would want to sell some or all your investments? 10%, 25%, 50%? There is no wrong answer if you answer this question honestly.
Everyone has a return they would like to make on their investments. What’s yours? 5%, 8%, 10% per year return? Maybe more? Your ability to earn a return on your investments is positively correlated to the amount of risk in those investments. Generally speaking, investing for higher returns exposes your portfolio to more risk (i.e., exposure to larger short-term losses) than does investing for lower returns. To realize the higher returns of a higher risk portfolio you must have the risk tolerance to be able to weather the short-term volatility that comes with it.
What is the rate of return required for you to experience the financial future you have in mind? This can be determined by first quantifying the amount of money it will take to achieve your tangible financial goals such as debt reduction, college education funding, lifestyle attainment and financial independence and when you will need it. Next benchmark where you are now, your assets and liabilities, income, expenses, and discretionary cash flow. The future rate of return you need to make on your investments is the elastic that pulls this all together. Can you afford to take a conservative investment approach and be content with lower returns because that is all you need to achieve all your financial goals and objectives? Or must you be more aggressive and seek higher returns with more risk to do so?
You are invested correctly if your investment portfolio is maintained at the intersectionality of these three attributes: your risk tolerance, your return objectives and what your WealthPlan TM requires in order to be successful.
For example – If you are invested in a globally diversified portfolio that has historically delivered an 8% long-term rate of return AND you are willing to tolerate the risk (exposure to larger short-term losses) that comes with such an investment AND by making 8% you are projected in your WealthPlan to achieve all your financial goals and objectives THEN you are invested correctly.
On the other hand, if you are invested to attempt to make 8% for your financial future to work out as you desire, but you have little to no risk tolerance (you will sell some or all of your investments if they go down) then you are not invested correctly. Something needs to change. You can either invest more conservatively in accordance with your low risk tolerance, accepting a lower rate of return and adjusting your future financial goals according or, accept a higher level of risk and keep your investments and your financial goals the same.
To determine if you are invested correctly is both an empirical and an emotional exercise. As such, you need a financial advocate like a FirstWave Financial WealthCoachTM on your team to help you make this determination and monitor your progress to the financial future you desire.
To find out how we can help you transform the complexity and confusion surrounding this important topic into your improved WealthConfidence, call us today (321)773-7773 to schedule your free initial consultation with one of our WealthCoaches™. For more information about FirstWave Financial check out our website at www.firstwavefinancial.com.