How investment risk tolerance affects your retirement planning

Written by V. Raymond Ferrara, CFP®

On January 17, 2021

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Most financial planning experts agree that you should start saving for your retirement as soon as possible if you ever want to reach your retirement goals. The first dollar that you save and invest is the one that produces the greatest return over time. How much you can save and invest varies from person to person, but one item of consideration that all investors share is how much they are willing to risk to lose.

With your retirement plan, you have the option of shifting the balance of your portfolio more toward high-risk investments or low-risk investments:

  • High-risk investments — High-risk investments are investment options that are likely to generate higher returns but are more vulnerable to market volatility, meaning you have an increased risk of taking a loss.
  • Low-risk investments — Low-risk investments follow safe markets, such as stable companies that make few major changes. These investments tend to be more stable during periods of volatility, but they usually do not generate high returns like high-risk investments.

How your investment risk tolerance affects your retirement plan

In short, how much you are willing to risk can affect how much you are able to gain. If you have a portfolio with a large mix of high-risk investments, you stand to potentially gain more but are also at the risk of losing more if the markets do not pan out like you hoped.

With a low-risk investment, you buy into safer options, such as consumer goods stocks, utilities and bonds. These investments usually generate gains at a slow rate and are not as vulnerable to market volatility. Balancing your portfolio more in this direction means you are likely to generate some gains with a low risk of loss, but you may not generate high returns that you would want for boosting your retirement portfolio.

Ultimately, the way you balance your portfolio is up to you and how much you are willing to risk losing. Some general advice many investors follow is to shift the balance of their portfolios to more high-risk investments when they are younger. If a high-risk investment ends up taking a loss, younger investors have more time to rebalance their portfolio and get back on a growth track.

Investors nearing their retirement or other savings goals may want to shift their portfolio more toward low-risk investments, so that they do not risk losing any of the wealth they have worked hard to save up for over the years.

Talk to a ProVise CFP® professional about the role of risk tolerance in your investments

For many investors, it is difficult to decide how much risk to take with their investments. You want to grow your wealth, but you do not want to risk losing what you have either. When facing this tough crossroads, it is helpful to have the expertise and guidance of experienced financial professionals by your side.

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about your investment risk tolerance? Contact ProVise today to schedule a complimentary consultation.

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