Understanding Your Risk Tolerance

Who has time to really understand their investments? After all isn’t that the reason most investors outsource their investment decisions to a financial advisor? Taking the time to learn the market is a vocation in itself. But if time is money, then knowing why you bought what you bought is a good part-time job to pursue. After a market correction, there always seem to be a few brave investors that dig deep into their portfolios to examine what they own. Often-too often-they are surprised to discover after educating themselves that they should never have invested in the financial product they bought for their portfolios and retirement plans.

Many investors may have complex mutual and electronic traded funds allocated in their retirement holdings that are too risky based on their risk tolerance. Undergoing a risk-assessment test can be a first step in building a financial profile. If your psychological profile just can’t handle the wild swings of the market, a 20-year time horizon may not be able to bring solace to your frayed emotions. You may have to seek out lower beta-risk products. Sometimes it’s not a matter of risk, it’s a matter of costs. Some investors have no idea what is the true price tag of the funds they own. They may have had the prospectus delivered to them and the expense ratio costs explained, but rarely are investors offered the Statement of Information (The SAI Report) that includes ancillary charges, some of which are higher than the expense ratio of the fund.

Another idea of interest is the diversification of investment asset classes and their market correlation. It’s tough for the average investor to get a handle on the economic forecast of the country, much less the world. The global markets are so interconnected that a nation like Greece can significantly affect the U.S. markets. So understanding true asset diversification and how they react under market conditions can alter your approach to investing. Everyone wants to avoid losses, but few escape the unpredictable seismic shifts that can send shockwaves throughout the world markets and trigger losses in your portfolio.