So yesterday I wrote about the topic of risk tolerance and asset allocation. This topic is extremely important for anyone who is investing. As they say, with risk comes reward, but also with risk comes… risk.
It is critical that people understand how much risk they can actually stomach if they wish to be successful investors in the long run. If they find that they have taken more risk than they are actually prepared for, they could end up doing something they will later regret!
As I wrote yesterday, I have been wondering about just how much risk I am willing to take. After all, I do not like the idea of being exposed in the event of a market downturn (who would?). At the same time, I really do love the potential growth of stocks. I am seeing, overall, how happy I am staking my bets on them for the long-term. (They call this “going long,” which means that you think a stock is going to go up, and invest with the expectation of benefiting accordingly… it doesn’t necessarily refer to how long you invest in it).
Since I started investing, I have been preparing myself to deal with the potential ups and downs of being invested in the stock market. I have been preparing myself to deal with exactly the kinds of bucking broncos that could make for a bumpy ride. I am fully aware that I may have to stomach thirty-, a forty-, or a fifty-percent drops in the value of my portfolio every so often. This could happen several times during the course of my investing career.
It’s not that I like the idea (I don’t). But I do believe in the long-term growth of the market, and I guess what I’m saying is, I’m willing to take the ride and see how it goes!
I am being thoughtful about this. I am doing my research, and I am asking myself tough questions to get to my own truth. I am willing to change my mind later. So far, I have concluded that it makes no sense to significantly change my stock position (ie, how much I’m invested in stocks relative to bonds). Sure, I might be willing to shift it 6-10%, but then I wonder, how much protection will this really give my portfolio in the event of a dramatic downturn? Is it really worth it?
Perhaps. Yet, even if I do that, I will still have the vast majority of my investments in stocks. I have done much to prepare myself for the possibility of significant drops. Meanwhile, I will continue to read, study, and learn. Perhaps somewhere down the road I will feel differently, I will know something different.
But I don’t know what the future holds, not as far as the market, nor as far as myself. I can only deal with me today.
And what I do know about me today is how much satisfaction I am getting out of learning about this topic 🙂
I look forward to the many future investing adventures!