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What’s Your Risk Number?
It’s impossible to invest (wisely anyway) without understanding what’s required to reach your financial goals. That’s what we all want right? To reach and enjoy our financial goals!
We may say we want X.XX% return, or the next hot IPO. We may boast of owning the hot new fund, or buying emerging market debt at the bottom. These investing strategies may accomplish your goals, or leave you penniless at the mission with a soup cup.
In reality, we all just want to reach our financial goals so we can enjoy life. Retire when you want, retire the way you want, spend as much as your finances will bear all while making sure you’ll never run out of money.
There are three components to understanding what’s required to reach your financial goals:
How much risk to you need to take in order to achieve the investment returns which allow you to meet your financial goals?
How much risk can you afford to take in the process? Will a major financial downturn completely derail your financial plan?
How much risk are you emotionally tolerant of? Can you embrace massive ups-and-downs in the market? Or are you emotionally capable of only small swings?
Your risk tolerance is the only one which is emotional in nature. It gauges how much volatility you’re comfortable with.
What risk tolerance you’re comfortable with alone will suffice if you have more money than you can spend! If you’re like the rest of us however, your risk capacity and risk required aren’t just important, they’re far more critical than your risk tolerance.
Retirement planning must be based on all three factors to some extent. One or two alone can easily leave your financial success to chance.