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How much risk should I be willing to take? That is the question many investors ask themselves, especially when the stock market seems to climb unabated day after day.
Reality is, it’s up to the investor. If you were to put money into an individual stock, you run the risk of losing the full investment. If you put the same amount into a mutual fund, due to the broad diversification of stocks in the pool, you can still lose money but not likely the full amount invested.
A good place to begin the decision as to how much risk to take, is to complete a risk profile assessment. This helps by asking questions to see what your level of risk is. Should you invest 10%, 20%, 30% or more in stock mutual funds? The assessment will help assist with your decision.
If an investor were to put 20% into stock mutual funds and the stock market dropped 15%, how much would you possibly lose during that time frame? Let’s do the math.
Assume you had a portfolio worth $500,000. If you had invested 20% in a stock mutual fund that dropped 15%, your $100,000 (20%) allocation in the mutual fund would be down $15,000. Could you stomach that amount? It’s possible the amount invested in bond mutual funds, the other 80%, would increase in value and/or pay interest to help offset the decline.
With that said as we are all aware, there is risk in investing. The amount of risk someone is willing to take is up to the individual, not the financial advisor. Interest rates are at historical low levels. Consider the levels below for the 10-year treasury, the proxy for interest rates.
10-Year treasury yield calendar year starting yield.1
Conservative investors that do not want to take the risk of the stock market have seen interest rates fall to levels never seen in the history of the financial markets. If you are a conservative investor, then it has been a challenging environment to generate a total return in today’s environment. Do you own a certificate of deposit, bank savings or checking account? If you do, then you no doubt get a good laugh at the interest deposited each month.
To reiterate the purpose of this information…take the time to complete a risk profile assessment to see if you could allocate some of your account to stock mutual funds. Give thought to how much volatility you are willing to take within your portfolio. No one can successfully forecast the next major correction. Corrections of 10%-15% are normal within the context of the stock market. If you’re willing to add some exposure to additional risk, you must take the step of filling out the risk assessment and communicating your willingness to your financial advisor.
You can access our online risk profile assessment by going to:
www.GlobalWealthSolutionsLLC.com and clicking on the tab entitled, (Risk Assessment Quiz)