Articles: Are you in your investment comfort zone?
Everyone has a different “comfort zone” for investments. This term refers to the level of risk you are willing to assume to meet your investment objectives.
Stage 1: At the earliest stage of adulthood, it is generally easier to take a more aggressive approach than you might in your retirement years. For example, if your time horizon for retirement is 30 to 40 years away, you can better with stand any short-term dips in the market.
Naturally, it’s advantageous to “buy low and sell high,” but this is easier said than done. Try to avoid being drawn into market timing temptations. Develop a balanced viewpoint with the help of a financial professional.
Note that inflation risk can be a significant factor in this stage.
This risk is the threat that your money will be worth less in the future because your portfolio hasn’t kept pace with inflation. To combat inflation risk, you might diversify your portfolio, typically by spreading out investments among stocks, bonds and cash alternatives. Of course, there are no absolute guarantees.
Stage 2: During middle adulthood generally, your late 30s through your late 50s or early 60s you are likely to have more investment experience and be less emotional about the ups and downs of the market. At this time many investors will trend toward a more conservative outlook. Financial objectives such as paying for a child’s college education, caring for an elderly relative and planning for retirement will come into sharper focus over the course of time.
Interest rate risk may become more of a factor during this stage of life. This is the risk that changes in interest rates will affect your investment portfolio. As interest rates rise, bond prices tend to fall, so you might consider buying bonds with different maturity rates, as well as spreading risk through a mix of long-term and short-term investments.
Stage 3: As the end of your work career and the beginning of retirement beckon, you may redefine your investment comfort zone again. Generally, you may be able to invest relatively conservatively, especially if you have been able to build up enough funds while you were working full-time. Nevertheless you will probably still need to invest for growth during retirement.
Consider whether your portfolio will be able to sustain your desired lifestyle in retirement. There is a potential risk that you could outlive your savings. Evaluate this risk and consider what your options are in light of your analysis. For example, you might adjust your port folio or decide to shorten or lengthen your working career (or maybe you will just semi-retire).Make sure you are comfortable with your risk exposure. Don’t try to go it alone: Obtain professional guidance to help find the “comfort zone” that is right for your situation.
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