Risk tolerance is the measure of how much risk you can handle as an investor. It may help determine what you can afford to lose, the time frame you have remaining to reach your goal and your emotional ability to handle risk.
Risk tolerance changes over time, too. Whether you’re investing conservatively, moderately or aggressively, age, income and circumstance all form your current level of tolerance. It’s always wise to reevaluate your risk tolerance to ensure as your risk tolerance changes, your portfolio reflects those changes as well. This is where many investors—and advisors—may fall short. Reevaluating as your life changes is imperative.
The Red Zone for Baby Boomers. The decade of danger lies in the five years before and after your retirement date. Market corrections, bear markets, Black Swan events and sideways markets can side line your retirement dreams and turn them into a nightmare. So it’s important to have a retirement game plan and an audible or two in your back pocket to back up your plan in case life hands you a setback. The world has changed. Globalization has made the planet smaller. Everything is correlated, so it’s hard to escape the gravity of the global impact of international markets on investments and even savings instruments.
Baby boomers have already been through the grueling bear market of 1973-1974. Then came Black Monday, October of 1987 when the market shed 22% of its value in a single day! And again in 2001-2003 the market endured double digit-compounded losses due to the siren song of the emerging tech industry. Many a young boomer loaded up on tech stocks driven by the fear of missing out on the tech revolution. But nothing could prepare the baby boomers for the greatest economic upheaval in their generation, the devaluing of home real estate and the market crash of 2008. Many didn’t recover from the housing debacle, losing their homes or seeing the value of their homes descend below their mortgages. Their 401(k) losses were between 30 to 40%. Real recovery may not have happened for most baby boomers. In all these events, time was on our side. But no longer. Time can’t heal all wounds because there’s not enough time to go around any longer. No one in or near retirement can take another blow to their portfolio. The time for conservation of your portfolio is now. Any significant delay could expose your holdings to another devaluation that may directly affect your retirement lifestyle.