Investing entails risk, but how you feel about that risk changes over time.
Your feelings may change based on recent market action.
A year ago, when stocks were coming off one of their strongest first quarters, you probably felt pretty good about taking risk. Today, in a bear market, global pandemic and probable recession, you likely feel differently.
Your perception of risk also may change as your life changes.
You may find that you have less of an appetite for risk when you’re retired and living off your investments than when you were in the workforce.
What to do when your feelings about risk change?
If you feel like you’re taking more risk than you can handle, should you make a change to your portfolio now or will that put your future goals at risk? Is it too late to take less risk? What if you need to be fully invested, but you currently feel like you’re hanging on for dear life?
We’ve been talking through these kinds of questions with many of our clients lately. Here are some of the questions that can help you think this through.
Are your investment plans still valid?
If you’ve designed and tested your initial asset allocation for your goals in retirement, then your allocation should still be valid and help you reach those goals, and ideally, you should stick with it.
While you may feel like changing your allocation now, you are often better off waiting until markets stabilize. Otherwise, you may find yourself selling at the worst possible time—just before a market rebound.
If you feel like you have to do something now, then decide in advance what changes you’ll make and try to make gradual adjustments. Remember that risk is a spectrum; it’s not an on-off switch, so look for ways to dial down risk rather than selling out entirely. If you’ve got a big stake in sector funds or more concentrated stock funds, you might move into more diversified core stock funds. If you currently own core stock funds, you could shift some of your money into balanced funds or non-correlated alternative funds, or increase your allocation to bond funds.
How are you holding up?
Your emotions also play a big role in your investment success, and you may have made it through the recent market downturn by the skin of your teeth. If you aren’t sure that you can stay invested if the market continues to slide, then consider lightening up on equities. You might sell 10 or 20% to reduce the pressure you’re feeling now and give you a little consolation if stocks fall again.
Keep in mind that if you're changing your allocation based on current fears, you should have a plan for when and how you’ll get back on track. You don’t necessarily want to let short-term moves turn into long-term changes to your allocation.
Unsure how much risk is right for you?
Risk is one of the most important aspects of successful long-term investing, and it can be challenging to get it right. If you aren’t sure that you’ve got an appropriate allocation or you’re just guessing about your risk level, you aren’t alone. Many people think about risk generally, as either aggressive or conservative, but most of us fall somewhere in between. Your goal is to figure out where you land on the risk spectrum.
There’s help available, if you need it. There are online questionnaires that aim to help you get a handle on risk, or you can choose to work with an advisor who can give you specific guidance based on your personal goals and needs.
Asset allocation is one of the top reasons why many people choose to work with an investment advisor. According to a Morgan Stanley survey, 86% of high-net-worth investors work with advisors for help allocating their assets.
Advisors like us have decades of experience helping people invest through difficult times like this, and now there are new tools that can help us see how taking more or less risk could affect a client’s overall chances of success.
Find out more about how a FundX advisor can help you get a handle on risk. Click here and let’s set up a time to talk.
A version of this originally appeared on Forbes.