When the investing alarm rings...Written by Steve Ciaccio, MBA, CPA, CFP®It is interesting how much more important an hour of sleep is when the alarm rings in the morning than it was when there was a good movie on TV the night before. When that alarm rings, and the work day is ahead of you, you cannot go back to the night before and get that sleep back.
When stock indexes rise in a bull market, some people might begin to feel that they should increase the level of risk that they should take. They might abandon their policy of maintaining a balanced portfolio and increase their percentage of higher risk investments and decrease their percentage of lower risk investments.
When the “investment alarm” rings, some people do not hear it immediately. They might believe that the market is experiencing a short term minor pull back only to find out much later that they have owned a high risk portfolio during a significantly downward market. In such circumstances, the losses can be substantial for someone who is not able to afford them. This is just one of many reasons that you might want to consider maintaining a portfolio that is suitable for your actual risk tolerance.
There are many ways to define what risk tolerance means. One definition of risk tolerance might be your ability to sustain a financial loss without impacting your present and future lifestyle.
There are many risk tolerance profile quizzes that can help you determine some general guidelines for your portfolio. Those risk tolerance profile quizzes can be helpful, but should be only one of many factors that help you determine how to invest. Just a few of the many other factors are your short term, medium term, and long term goals. You might want to consider setting aside cash for your short term and medium term needs so that you do not have to sell investments under conditions that are less than favorable. Although you might forgo potential gains, you also might avoid potential losses. Unexpected emergencies, such as job loss or large expenses, should be considered and planned for as well. There are many other factors to consider in addition to the above.
Although many people have a desire to reap some of the gains that they see when investments are moving up in value, you might want to consider how you will be affected if the value of your investments move down sharply. For some, forgoing gains can be much more tolerable than sustaining a loss.
Just like you can’t get that hour of sleep back once your alarm rings, there is no guaranty that your investments will regain their value after a loss has occurred. For your benefit, it is important to stay true to your actual risk tolerance and invest accordingly.
All the best to you!
Steve Ciaccio, MBA, CPA, CFP®
Steve Ciaccio, MBA, CPA, CFP® is the founder of Ciaccio Wealth Management, Ltd., located at 232 South Batavia Avenue, Batavia. He can be reached at 630-454-4599, Steve.Ciaccio@LPL.com. The opinions voiced in this article are for general information only and are not intended to provide specific investment or tax advice for any individual or entity.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Copyright Steve Ciaccio 2017