Thinking about risk is important when you’re figuring out what your investment portfolio is going to look like, but that’s where most people stop. If you want to reach your financial goals (and you should!) then you must let your timeframes dictate your strategy and not your risk tolerance. Find out why what you need and what you want will sometimes lead you in opposite directions when it comes to your finances.

• We need to let the timeframe dictate the compromise between the three R’s for the money we are going to set aside. It sounds simple but that’s not the way the industry works.
• The risk tolerance assessment that brokerage houses use is designed to figure out how the maximum amount of volatility you can tolerate but it’s misguided. It’s based on what you want instead of what you need.
• What you need are goals that have certain timeframes, and then use those time frames need to rule how you put together your investment portfolio.
• Wayne and Lisa have a 14-year old child who loves to eat sugary foods. If given the choice that’s probably all they would eat. If he were completing a questionnaire from his nutritionist, he would profess that he has a very high sugar tolerance because that’s what he wants, but that isn’t what’s best for him. A risk tolerance assessment is basically the same thing.
• Everyone wants zero risk to their investments but because of the required tradeoffs between risk, reward, and readiness that’s impossible. If you invested so that you were exposed to no risk at all you would never be able to achieve your financial goals.
• Just because you may have a short term goal, that doesn’t mean that you should put your money into a high-risk high reward investment. Risk tolerance can help you feel comfortable but it doesn’t necessarily help you achieve your investment goals.
• Your comfort level and preferences should not determine your investment strategy.
• Make the choice to push aside your instincts to do what you want and instead make the choice to do what you need.
• Risk capacity is a better way to think about the idea of risk tolerance.
• Your timeframe rules, regardless of what your risk tolerance is. If you’re saving for retirement and you choose your portfolio based on your risk tolerance instead of your timeframe, it can mean the difference of many years until you reach your goals.
• You have to be aware of the consequences of your financial choices and weigh the outcomes against your values and goals. Let the timeframe of your goals dictate your investment strategy.

 

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.