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Setting Risk Parameters
We have all heard terms like risk/reward ratio or cost/benefit analysis. These are the concept of weighing what we are risking against what we hope to gain by assuming that risk. When dealing with risk and cost, we want those elements of the ratios to be small, while the rewards and benefits are large. Certainly, this is much harder to achieve than it is to discuss.
We would all like to get the best value for our money when we do something. If we go on vacation, we would, no doubt, like to vacation at a five star resort for the price of a stay at a budget motel. If we decide to climb to the top of a tall mountain for its magnificent view, most of us would like to reach the summit without running the risk of falling off the narrow trail to the top. Ah, such is the human condition.
Years ago, I heard someone say, “Everyone wants to go to heaven, but nobody wants to die.” The person who said this was quoting a book. I do not remember the name of it. Anyway, it sounds true to me. After all, wouldn’t it be fantastic to lose weight without dieting? How about saving money while buying more of the things we want, all while working less?
It is nice to dream. I believe it is even better to dream and to make concrete plans to make those dreams come true. Part of a creating a plan to live our dreams is to realistically assess what it will take to achieve those dreams. Working to achieve anything always comes with risk attached. After all, simply being alive comes with risk. However, that is a risk I believe most of us are willing to take.
When it comes to our financial goals, we are faced with risk. When we invest we might out and out lose our money. And, yes, there are some financial vehicles that might be touted as no risk or low risk, but the reality is we are still at risk in those. This might be because there might be better alternatives or we might suffer from the effects of inflation compared to an anemic return, etc.
What to do?
The first thing is to come to understand our personal taste for or aversion to risk. The next thing is to develop personal risk parameters. Sure, there are certain industry formulas and standards to help us determine what a reasonable portfolio might look like for a person of a certain age, making a specific income, along with a certain amount of money to invest. However, your personal life philosophy, your goals, your needs, your desires and your personal taste for risk must be taken into consideration as well.
Some folks might be extremely risk averse. Now, the experts might say that their investment portfolio should break down a certain way, but what if the breakdown leaves them with more risk than they feel comfortable with? What if they are kept up at night worrying about what might happen?
You see, formulas and standards are great. However, you are not a statistic. You are you, a unique, living, breathing person. What good is having more money in the future if, in the here and now, you are stressed by the risks you are taking with your investments? And, looking at it in another direction, what good is making money and investing it in such a way that it barely has the potential to grow. No doubt, a middle ground might be the best thing to seek out.
A good investment portfolio can be like a beautiful mosaic. It can be composed of various components that, on their own, do not seem particularly compelling. However, working together, they just might paint the picture you are dreaming of. Maybe.
How might you attempt to create what will hopefully be a beautiful mosaic? Well, first, work to assess your own risk tolerances. Second, get to know some time honored approaches for people in your circumstances. Think in terms of age, family size, current savings, income, projected time to retirement, etc. Third, work with a financial services professional whom you trust, to help create that mosaic with you.
You might be of the mind to do this on your own and you certainly could. Yet, if you do everything on your own, you might miss something important that a second set of eyes might catch. Then again, you might not. Again, this comes down to your taste for risk.
Create a plan and look to work that plan. I have heard it said that tomorrow waits for no one. I believe that. Take action now.
Scott McGimpsey May 24th, 2016
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC