How to Determine Your Risk Level - Part I
Here is a question that I often get - Bob, can you look at my 401 (k) plan and tell me what you think? I call that the surface question. There is an underlying question that is the real question.
What do you think of the risk level of my 401 K plan? Am I taking to many risks? When asked, do I need to make changes? The question really is - should I change the risk level of my investments?
If you want to dive deeper, the additional question is - Am I taking the right kind of risk? We will save that one for a later time.
I wanted to write about this today because it is critical that investors understand and are comfortable with the amount of risk they are taking. Personally, I think that things are about to get dicey (risky) in the stock market. This topic is so incredibly important. Yet, when financial media writes about it, the subject becomes confusing and well...boring. Let's not let that happen. I will turn this into a 3 part series this week and guide you through the world of risk.
Step 1: What is my risk category? In the 28 years of working with people, I have broken it down into the following categories:
Highest Risk - Aggressive Growth - The investor wants to take the highest level of risk and wants to beat the market.
Second Highest Risk - Growth - The investor wants to take the same amount of risk as the market.
Third Highest Risk - Moderate - The investor wants to take a balanced approach to risk (most people).
Fourth Highest Risk - Conservative - The investor wants to minimize risk and is okay with a low rate of growth regardless of market direction.
Lowest Form of Risk - Safe Money - The investor wants guarantees and, at the same time, get the maximum level of growth given a guarantee against loss.
Most people can pick a risk level. For most, a risk level will speak to them. Now you have to go through Step 2 (tomorrow) - So I have picked a risk level. Is this the right one? Step 2 involves assessing your risk level based on two different objectives. First, you have to answer the question - Can I live with the loss potential? After all, there is a gain/loss factor associated with 4 of the five risk levels above. Second, are my retirement goals congruent with the level of risk that I am willing to take?
If you want a more in-depth look at your risk level, go to this link and take our risk survey. It takes just a few minutes. I will then send you a risk analysis explaining your risk level and what to be mindful of when investing money.