This is a good chance for me to remind you that the markets are not out to get you or your 401(k) investments. If I tried to tell you that during times of extreme economic turmoil, you might not believe me.
The market will inevitably trip, stumble, or fall sometimes. When your portfolio does hit some bumps and you’re in crisis mode, it’s hard to find your bearings. It can feel like the market is out to get you, and it’s natural to take that personally.
Consider the ups and downs you’ve experienced as an investor, and use that to develop a retirement investing strategy.
When investments are performing well and the economy seems to be moving in the right direction, it feels good to see those 401(k) statements. You may feel like you should take more risk with your investments. Still, think about the disorder we’ve seen during the past four years. Remember how you felt when the markets dropped in 2008 and the recession hit? How did your stomach hold up in the aftermath of last year’s tsunami, when the markets took some dips? And did you keep it together through the political shenanigans that put the markets on edge during the debt ceiling and budgetary negotiations last year?
How have you reacted, as an investor, to market volatility? Some people feel panic when their portfolio loses value. Others are merely uncomfortable. And some people are mostly unfazed. Your risk tolerance has a lot to do with your personality.
Risk tolerance is a measurement that tells us how you react when the market gets bumpy or drops. There isn’t a “good” or “bad” risk tolerance level; it all depends on what helps you sleep well at night.
Someone with a higher risk tolerance can stomach a market roller coaster fairly well, so that investor can be more aggressive, selecting more volatile investments that may have higher returns over the long term.
On the other hand, someone with a lower risk tolerance will feel more comfortable with a more conservative portfolio.
Since this is retirement investing, short-term market volatility shouldn’t have any major effect on the way you invest. The real risk for long-term retirement investors is overreaction.
You need to figure out what allocation is right for your risk tolerance and then stick with it during good times and bad.
When the roller coaster starts, it’s nearly impossible to be objective; that’s why it’s so important to take advantage of calmer periods. Create an investing strategy that spreads your retirement wealth through multiple asset classes.
Remember that your risk tolerance is one of a few important variables in figuring your portfolio allocation. You should also consider your time line to retirement and your goals as you create a long-term investing strategy.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.