During the last week the stock market has had some serious swings both up and down, these short-term fluctuations are often hard to predict and cause serious anxiety as an investor if you aren't prepared for them. Especially in the downturns, because you're seeing your hard-earned money disappear quickly.
At Wilson Financial, we like to prepare all of our clients for foreseeable changes that may occur in the market, all while developing a range of expected return on your investments, so when unexpected changes do occur, you'll be ready. We do this by finding out your individual Risk Score and Risk Tolerance.
Example: Someone with a risk score of 25 is comfortable with an investment return range of +5% to -3% in the next 6 months. Whereas, a risk score of 75 is comfortable with a range of +25% to -16% over the next 6 months.
You can see that it can be very important to be invested in a manner that matches your Risk Score and what your comfortable with. However, unlike Wilson Financial, many advisors don't use this approach. Instead they provide investment options based solely on your age, or another unquantifiable approach, which can leave you up at night worrying, because you didn't know what to expect.
Good news, there is a way to prepare for the stock market fluctuations and it's by having a well designed investment plan, that will meet your unique needs. One of the most important parts of this plan is to develop an understanding of your Risk Score from above and your Risk Tolerance.
What is Risk Tolerance? I know it sounds a bit technical, but I'm not using the word "Risk", meaning the amount of your investments your willing to gamble with. Instead, we use "Risk" as the amount of fluctuation in your investment balance (either up or down) over the next six months that you're comfortable with and isn't going to cause severe anxiety and you to be up all night worrying.
Risk Tolerance = Amount of fluctuation in your investments over the next 6 months that you're comfortable with.
Every person is going to have a different Risk Tolerance, this is particularly true within couples, as well. Hopefully, you found out your risk score by answering the couple of questions above. Once we know your score, we can develop an investment portfolio for you that has the same level of acceptable "Risk". So when the stock market swings up and down, as we know it will, you won't have to worry about your investments, because you've planned ahead and made sure your savings is invested properly.
The problem without knowing you Risk Tolerance and Risk Score, you don't really ever know if you're investments are too aggressive for what you're comfortable with or maybe you're invested to conservatively for your retirement goals. Unfortunately, you don't really ever know until either your savings have declined more than you're comfortable with or you get to retirement and don't have enough in your savings. Either way I don't want anyone to face these situations, so let's find out your risk score and make sure you're always prepared!