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Give Your Financial Risk Tolerance a Check-Up

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    NEWSLETTERS

    Did you sell at the bottom? Are you awake at night worrying about your money? Most advisors suggest you stay the course, but a good gut check may be worth your time. (Published Wednesday, Aug 10, 2011)

    Did you sell at the bottom? Are you awake at night worrying about your money? These may be signals that your financial risk tolerance needs a check-up.

    Most advisors suggest you stay the course, but a good gut check may be worth your time.

    "Don’t chase the markets. Chase your own financial goals," reminds financial planner Michael Evans, who heads his own firm, The Cogent Advisor.

    Evans says history still shows us the bull markets run longer and higher than the bear markets, and those who take on too much risk are in danger of blowing up their long term financial plans if they get scared and jump out of the market.

    He advises investors to treat the market as an ally not an adversary.

    A handy way to think about market risk is as a trio of ingredients -- your ability, willingness and need to take investment risk. These are the same ingredients for everyone, but there is a different recipe for each of us, depending on the right, individual mix. 

    • Ability: Your ability to take market risk is determined by how well-positioned you are to withstand it, when it inevitably, periodically occurs:
    • Your investment horizon: Do you have the time to ride out the bear markets, or will you need your wealth to be available in the near-term?
    • Your income stream: Is your income source steady and reliable?
    • Access to "liquid" (cash) assets: Do you have a reserve fund for anticipated and unexpected cash needs, such as medical bills, car repairs or a job loss?
    • Willingness: Even if you're financially able to accept market risk, do you have the stomach for it?
    • Need: You may be able and willing to accept market risk, but, here’s an interesting question, often left unasked: Do you need to? If you’re well positioned with your current wealth to achieve your most cherished goals, why expose yourself to market risk unnecessarily? If you’ve got a way to go toward your goals, you may need to take another look at your needs versus your desires, and consider a few adjustments.

    Bear markets happen. If you aren’t willing to ride them out by sticking with your predetermined investment strategy, you are likely to do yourself serious damage in the long run.

    Once you’ve determined your risk tolerance mix, choose the lowest stock-to-bond ratio to meet your balanced goals.

    Be ever aware, however, that there will always be investment risk. While history shows us that stocks have gone up over the long haul, anything can happen to them along the way.

    Thus, bottom line, stocks are inherently high-risk investments.