Although it can be uncomfortable at times, much of your success depends on your ability to take the right risks. The importance of risk-taking is especially prevalent in investing, where risk is directly associated with the ability to preserve and grow your wealth.
So, how do you manage the risk of investing and come out successful? Check out our guide to manage the risk of investing:
Figure out your ideal tolerance
Just like with a diet, the best investment plan is one you can actually stick to. For instance, a portfolio of nearly all stocks might see higher overall returns, but it won’t do you any good if you can’t stomach the risks of short-term volatility.
That’s why determining the right risk tolerance is crucial for a successful long-term investment portfolio. Although nobody enjoys drops in the market, the right portfolio is one where you can handle those drops effectively to reach your goals over time. This is a blend of art and science, and it involves adjusting your asset allocation based on your unique investing timeframe.
Separate the types of risk
Not all risk pays off equally. As an extreme example, there’s a difference between being paid $100 to cross the street and tightrope across the Niagara Falls. In investing, this is known as compensated risk. Much of this depends on your ability to choose investments that offer returns equal to their risk, and to avoid hidden fees and other costs that eat away at your returns (while doing nothing to decrease risk).
Work with a financial advisor to manage the risk of investing
The right financial advisor can help guide you determine a healthy appetite for risk, and act as a coach when there’s temptation to stray from your investment plan. At LexION Capital, we can help you accomplish this through our personalized guidance and wealth forecasting tools, which let your pre-experience the risk of different portfolios. As fiduciary advisors, we only choose investments that will be in the best interests of our clients. If you’d like to learn more, don’t hesitate to contact us today.