For Mark Roberts’ Use: Last month, we all received a painful reminder that the stock market doesn’t always behave the way we hope it will. If you’re feeling a bit shaken up, that’s normal. But does a rocky stock market signal the need to run from it? As you draw closer to retirement (or if you’re already retired), should you avoid stock entirely?
Avoid dualistic thinking. Many investors make the mistake of thinking that they must either “risk it all” by investing in the stock market, or play it completely safe and avoid stock entirely. In reality, very few people go to either of these extremes, nor should they. There’s an enormous middle ground, and that’s where most people should focus their efforts.
Understand your risk tolerance. Yes, the “riskier” investments are often those that hold the potential for greater returns, whereas the “safer” investments generally promise lower returns in exchange for security. When we analyze our situations, we can all put a number on the amount of assets we could stand to lose, as well as the amount of assets we definitely need to keep protected. Those numbers are different for everyone, and they boil down to your risk tolerance.
Think about your retirement budget. How much income do you need to generate each year, in order to stay cover necessities (plus a little wiggle room)? This will help you understand how much of your assets really do need to be protected, meaning held in safer investment vehicles.
On the other hand, if you have considerably more assets than that number, your risk tolerance might allow you to “play” the stock market a bit more than the average person. When you reap rewards, you will enjoy extra funds for optional expenditures. But when you lose, you don’t find yourself scrambling to cover basic expenses.
Can you afford to avoid the stock market? You might be wondering if you can afford to invest in stocks, but really, can you afford not to? If you can generate plenty of income without worrying about stocks at all, and you prefer a conservative approach to finances, then sure. You can probably avoid the stock market. But most people can’t afford to abandon the market entirely; they still need, or would greatly prefer, a bit of growth.
These are issues that we can help you investigate. If you’ve been feeling worried about the stock market, give us a call and we’ll help you analyze your portfolio, identify your risk tolerance, and decide if things need to be rebalanced.