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Develop an Investment Strategy that Reflects Your Tolerance to Risk

February 13, 2015

In many ways we’ve become a do-it-yourself society. In our day to day lives, a sense of independence drives many people to complete maintenance work on their own vehicle or take on complex projects around the house.  I’ve witnessed a number of people approach their financial futures with the same sense of independence. However, working with a professional or doing extensive due diligence is critical to the success of your portfolio. One of the most important factors to consider when developing an investment strategy, is considering the level of risk you’re comfortable with taking in order to achieve your desired lifestyle.     

The following tips will help you build an appropriate investment strategy to reflect your risk tolerance:

Set Realistic Goals

In developing any type of strategy, it is important to start with your goals. What is the lifestyle that you hope to enjoy in retirement? Diversifying your portfolio with traditional investments such as stocks and bonds and alternative investments such as energy and precious metals may help you protect your overall portfolio against risk. Working with a professional can help you assess the investment vehicles that are positioned to help achieve your goals. 

Understand Your Tolerance for Risk

Risk is a part of any and all investments. Investing in low-risk blue chip stocks that have proven their return over time may be safe if your intention is to grow your investment slowly for an adequate return over a longer period. However, if you are approaching retirement and have lofty lifestyle goals, low risk investments may not provide the returns you seek. Unless you are familiar with the ins and outs of investing, depend on a financial advisor to review your investment strategy and ensure that it has a balanced mix of stocks, bonds, cash and alternatives that are appropriate depending on your risk tolerance and goals. A reliable mixture of investments can help increase the likelihood that you will experience the benefits of each, while mitigating the potential risks involved with the various asset channels. The goal is to create a balanced risk/return profile that fits your current financial situation and goals, while generating the best possible return over the life of the investments.

Understand Timelines 

Timing is critical when it comes to investing. Investment and savings growth is subject to the power of compound interest and time. The sooner you start saving and investing, the more time you will have for potential growth.

Your timeline has to coincide with your goals and risk tolerance in establishing your investment strategy. All investment strategies come with risk. By working with a financial professional, you add expertise to your financial team and increase the likelihood of creating a portfolio that helps you achieve the retirement lifestyle you seek by properly balancing your risk tolerance, timeline and goals.