It’s fun when the market goes up. It is also a reminder that it can just as easily go down. It is that volatility that ultimately gives investors a return on their money. However, not every investor has the same set of financial circumstances or goals. That is why the following three questions are so important in determining the appropriate level of volatility (risk) for an individual’s investment portfolio:
- Do I have the need for risk in my portfolio? If one started investing late in life, has not saved enough, or has not had favorable results in the past, then they have a greater need for higher returns to reach their end-goal. To achieve higher returns, one must have more risk, or, more exposure to stocks and less to bonds.
- Do I have the ability to have risk in my portfolio? While an investor may have the need for risk, they may be approaching the end of their investment horizon which means they may not have enough time to recover from a down market. Simply stated, they don’t have the ability to have a high degree of risk in their portfolio. This is not necessarily based on one’s age. The beauty of being a dentist (self-employed) is that there is no mandatory retirement age, so if you are 60 years of age, you could conceivably work past age 65 while an airline pilot may not.
- Do I have the willingness to have risk in my portfolio? Regardless of one’s need or ability to build risk into their investment portfolio, you need to be able to sleep at night. Some people have no problem riding through volatile markets while others break into cold sweats with every point change in the Dow. This is a very personal decision but one that should be discussed with your advisor who, theoretically, knows you really well.
These are difficult questions for many of us because there are so many variables. Working with an advisor that uses the right tools (Discovery Meetings, Monte Carlo Simulations, Low Cost/Globally Diversified Passive Asset Class Mutual Funds), dentist investors have what they need to make informed and more prudent decisions.