Features

Think Hard Before You Raise Your Risk

By Deborah Jeanne Sergeant

 

If you feel like your retirement fund could use a boost, carefully consider whether taking on greater risk is a good idea.

“Investing in the stock-bond market is by definition assuming risk since unlike a bank account there are no financial guarantees,” said Cynthia Scott, financial adviser and owner of OMC Financial in DeWitt. “So, the next question is, are you taking on the appropriate risk for your financial situation? Are you too conservative or too aggressive in your portfolio allocation?”

Investors who are too conservative may not keep up with their future income needs. But those who are too aggressive may lose money that needed for future income.

“Both approaches can impact your future lifestyle,” Scott added.

Instead, she advises a moderate risk portfolio that is diversified in many areas of the market, “some bonds, stocks and cash,” she said. “There is no guarantee that you can’t lose money, but you have spread your risk so that the overall impact may be less.”

The reason of course is that if the riskier investment sours, you’re that much further behind in retirement savings.

Deciding whether or not to take on more risk involves evaluating the capacity for suffering loss and the ability to recover.

A disappointing investment and subsequent loss could mean delaying retirement and possibly curtailing post-retirement plans such as traveling, purchasing a new home and helping out your adult children or grandchildren. It could mean taking on a second job for a few years and lowering your quality of life.

When clients ask about risk, Randy L. Zeigler, certified financial planner and private wealth adviser for Ameriprise Financial Services, LLC in Oswego, advises that “it is best to take risk with investment capital that is targeted toward long-term goals. I generally do not advise taking on risk when the goal period is shorter than four years. Money that will be needed to pay for a project or specific financial goal within a three to four year timeframe should normally be held in certificates, money market mutual funds or other types of short-term savings instruments.

“When one has a goal that extends beyond four years, then accepting some level of risk makes sense in order to have the potential to generate greater long-term average annual rates of return. I usually advise people with no investment experience to begin slowly with variable investments, watch how the securities markets fluctuate and try to educate oneself to understand how both stock and bond assets work.”

Investing isn’t a shortsighted endeavor. Zeigler encourages clients to develop a comfort level with fluctuating asset values. At that point, they could invest a greater percentage into equity types of assets “but we always find out our real risk tolerance during a recessionary period, when stock prices are down. I encourage my clients to attempt to be patient investors, to try not to manage money with too much emotion and to be careful how they respond — not react — to market volatility and pricing changes.”

Taking on more risk doesn’t necessarily mean higher returns. It’s important to remember that younger people can absorb more losses as they have more time to recoup them by cutting expenses, working more and taking full advantage of any company-matched investment plans.

Everyone investing to grow their retirement fund should meet with a financial advisor who can offer a plan tailored to their specific goals, timeline, risk tolerance and overall financial situation.