Posts Taged risk-tolerance

Ask David: What are the Top Considerations to Make Regarding My Financial Decisions?

Sifting through your financial decisions requires attention to detail and management of more than a few moving pieces. Today, we’re talking with advisor David Hemler, MS, MPAS®, CFP® about some of the primary considerations to make when thinking through financial decisions, big and small.

Consideration 1: Risk

Are you considering doing something with some of your money? What’s the risk? Everything has a risk and usually if something sounds too good to be true, it often is.

Your financial advisor can help you navigate the potential risks associated with your financial decisions, whether you’re planning to make a large purchase in the near future or are considering your retirement savings plans.

Consideration 2: Taxes

Many folks who have gotten to know me have likely heard me say; “risk and taxes, risk and taxes…” These are two main factors of working in financial planning.

While paying taxes is a certainty, overpaying on your taxes doesn’t have to be. Financial planning and maintaining a cohesive tax strategy can prevent you from paying too much in taxes on your investments, returns, and withdrawals. Your financial advisor can be an invaluable partner in determining a tax strategy that may save you money over time.

Consideration 3: Allocation

Allocation refers to the areas where you have your wealth allocated. Most people consider their stocks, bonds, cash and real estate investments as the primary areas where their assets are concentrated. But it’s important to know where your assets are distributed and how this lines up with your risk tolerance or risk acceptance and tax strategy.

There is no one size fits all approach to allocation planning, and it’s important to talk to your financial advisor about different ways you might allocate your wealth. Age-based investing and general rules of thumb come into play here, too, so it’s a good idea to work with an advisor who has a solid understanding of your situation and goals, as well as the investment options you have before you.

Consideration 4: Diversification

In some ways, diversification is similar to allocation, but with a little more nuance. You can think of allocation as the way your assets are distributed throughout larger baskets and diversification as the components that make up those baskets.

For example, if you have stock investments, you wouldn’t want to put all of your investment into a single stock. Instead, you’d split your investments between various stocks and fund options to build a more robust portfolio.

More diversity in your financial makeup makes your finances more likely to withstand market fluctuations and varying risk levels across your asset allocations.

Consideration 5: Fees

There are fees associated with many of your investments and financial activities. Sometimes, it can seem like choosing a lower fee investment is better than a higher fee one, if the returns from each are equal.

But, as with many things in finance, things aren’t always as they appear. The best way to avoid tying your finances up in unnecessary fees is to work with an advisor who can help you to understand the various fees, including hidden fees, that your financial decisions might incur.

Consideration 6: Faith

Lastly, one of the last things to consider in making your financial decisions is your faith in the decisions that you’ve made. While emotional investing isn’t the ticket to reaching your goals, having faith in the process is an essential part of managing your wealth.

When you consider a dollar, think about how you might invest it, how long it can stay there, and how ups and downs might bring you a return or loss on that single dollar. Now, apply this principle to your financial decision making process and you’ll start to see how the faith aspect works when it comes to wealth management.

Do you have money questions? Contact Puckett & Sturgill Financial Group to learn about how we can help you make informed financial decisions with confidence. Be well and prosper!

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Risky Business: Understanding Your Risk Tolerance and Why it Matters

An important aspect of planning your investment portfolio is balancing your risk and payout potential to help you work toward your ideal financial future.

After all, you aren’t going to grow your wealth if you keep it hidden beneath your mattress in case of a rainy day, right? However, you don’t have to swing to the other extreme and rely exclusively on high-risk investments either.

Finding a happy medium will make you more comfortable with your portfolio and should help you feel in control of your future financial prospects. The first step to achieving this balance is finding your personal risk tolerance level.

So, what is risk? According to the Financial Industry Regulatory Authority (FINRA) “Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare”. The uncertainty associated with future returns and the volatility of securities prices can cause investors to make emotionally-charged decisions and either sell too early or invest too conservatively (or too aggressively). Managing risk helps you stick to your investment plan and is key to good long-term investment results.

What is Risk Tolerance?

Investopedia defines risk tolerance as “the degree of variability in investment returns that an investor is willing to withstand”. Human beings are all risk tolerant to a certain degree, but everyone’s own level of risk tolerance varies. There are multiple factors that contribute to your personal level of risk tolerance, including:

  • What is time frame for achieving your investment goals?
  • How much have you already saved? Are you currently saving?
  • How much will you need to spend? How long do you need your funds to last?
  • Think about past experiences. (Here’s an easy test: If you find yourself constantly afraid of the next market crash, it may be the case that your balance of risky and less risky assets is not appropriate for you.)

In general, we tend to shy away from risk. In fact, we’re likely to be more than twice as concerned about avoiding loss than we are about achieving potential gains. This is known as loss aversion in behavioral finance.

Investing in the equity and bond markets is inherently risky. As an investor, you shouldn’t take more risk than you need to, are able to, or are comfortable with. Successful investing often means sticking with an investment plan that experiences both good times and bad times.

Balance Your Portfolio

Once you’re aware of your personal comfort zone and ideal level of risk tolerance, you are better prepared to build your portfolio. Sometimes, investors find that their portfolios are full of investments that are skewed toward more or less risk than they’re personally comfortable carrying.

If you suspect that your portfolio is imbalanced, talk to your advisor about how you can make adjustments to align your portfolio with your risk tolerance level. Here are some of the ways you can stay on top of the level of risk your portfolio contains:

  • Analyze investment risk and return relationships
  • Diversify your investments
  • Stay on top of economic trends and developments that can impact investments

Be Realistic

As you consider your risk tolerance, you do need to continue to approach your financial plan with a measure of realism. There is some unavoidable amount of risk that’s necessary to growing your investments to achieve your future financial goals.

If you have a particularly hard time coping with the requisite risk associated with building and managing your portfolio, talk to your financial advisor about how to find confidence and ways that you can minimize risks along the way. A trustworthy advisor should be able to guide you to the right investments for your lifestyle and can give you pointers on avoiding emotional investment decisions that could sidetrack your progress.

To learn more about how personalized financial advice can help you find the right balance in your investment portfolio email or call Jacob Sturgill today.

Important Disclosures:
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

References:
Investopedia on risk tolerance
Finra.org on reality investment risk