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compete with inflation - at a minimum. When inflation is 8-9%, it’s obviously much harder to do so. Don’t make the mistake of thinking your nest egg is going to be worth the same amount in a decade. The numbers may be the same, but the value it holds will be much less.
WHY DO I NEED A SCORE?
Part of my job as a financial advisor is
to know any given clients’ risk profile. It’s impossible to make investment recommendations to someone if I don’t know their goals, objectives, and risk tolerance. One of the main reasons why
to have short-term financial needs. This investor is going to be building a new barn
in 6 to 12 months. In hopes of earning a return on the money he has put aside for this barn; he invests in a couple of mutual funds. Within 3 months, the mutual funds went down 15% and now this investor doesn’t have the capital to build the exact barn that was discussed. The mistake here is that the investor didn’t realize it was a short-term need and invested in mutual funds that are meant for the long-term. The smart approach here would’ve been to place the money in something with a low-risk score like a money
which in turn produces low returns. The investor had assumed that the fund options in the 401k plan matched his retirement objective and were helping achieve that goal. Now 10 years have passed and the returns are far lower than what was anticipated
after noticing that conservative bond funds made up a majority of the portfolio. Early retirement is no longer on the table.
Investor that is ahead of the game – Everyone seems to have the latest and greatest investment opportunity. For my last example, this investor is infatuated with cryptocurrency and truly believes it’s the next greatest
FINANCIAL PLANNING
you should have a risk score is to feel comfortable with the way your assets are positioned. Too many people lose sleep at night because they
are worried about losing all their money. Find
a portfolio that matches your comfort level. In a perfect world, the catchphrase would be “low risk, high reward.” If that were realistic, we’d all be retired. The actual phrases are “low risk, low reward” and “high risk, high reward.” Knowing this, you need to do some thinking on what your goals are with your dollars. If you want to grow your portfolio as much as possible, you may need to accept more risk. If your goal it to keep the principle intact and give all your money to your kids, then your score might be a bit lower, which is perfectly fine. I have a couple
of examples I’d like to share of how not having a
risk score can have a negative effect.
Investor with a short time frame – It is very common
market fund to preserve the principle. Investor with the wrong portfolio –
Most Americans build their wealth through an employer sponsored retirement plan. This particular investor has a 401k and maximizes contributions every year. Considering that this investor is 32 years old, growth is the primary objective. The idea is to supercharge investment returns while maximizing the 401k. The investor strongly believes that early retirement is on the table with the strategy at hand. Come to find out, the overall risk of his portfolio is very low,
investment. The investor doesn’t realize that the risk score of the crypto investments is through the roof risky. This investor has a point to prove and invests 80% of their portfolio in crypto. Similar to what has happened time and time again, this portion of the portfolio takes a huge hit and drops 50%. The investor then gets extremely nervous and sells for a huge loss.
You can clearly see how these mistakes are made, and there are several more examples that I could share. Having a risk score is absolutely paramount. It may seem silly
or unnecessary, but I can assure you, the investors in the above examples thought the same thing until they realized the severity of their mistakes. When talking to a financial professional about your retirement dollars,
be sure that they assess your level of risk based
on your emotional acceptance to the ups and downs and
invest your assets in an appropriate portfolio.
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