December 23, 2019
By The Trust Company of Tennessee
One of the most common questions advisors are asked is: “How should I be invested?”
Determining asset allocation is not a one-size fits all process. While it may be easy to pick a balanced, middle-of-the-road portfolio or base investments on age or income, those may not be the best strategies to achieve your goals.
An advisor can help you see the big picture and create a plan.
We’ll consider three types of risk: risk capacity, risk appetite and risk tolerance. Risk capacity is your ability to take risk. Risk appetite is your need to take risk and is related to the amount of return you need. Risk tolerance is simply your willingness to take risk.
Think about a young professional who has a long time before retirement – that person has time to take on more risk and likely needs to in order to achieve a sufficient return. Does that always mean that someone in this position is willing to take on more risk?
If we associate age and time until retirement with risk tolerance, we may be setting up those investors for failure in the event of market volatility. If investors can’t handle market swings, they are more likely to get out of the market altogether rather than reevaluate their risk tolerance.
As advisors, we want to find the ideal risk level based on the three risk components.
We’ll also consider reward.
Generally speaking, more investment risk means higher possible reward, but chasing reward alone is dangerous and ignores risk all together. The opposite also is true. Most of us cannot pursue zero risk, all cash investments with little to no reward, and still achieve our long-term goals.
We must strike a balance between risk and reward.
An advisor can help by taking all information into consideration, including your risk tolerance, and creating a plan that includes an appropriate amount of risk to meet your goals.
Goal-based planning shifts the focus away from chasing returns and helps you plan well for your goals and prepare for life’s transitions. The Trust Company of Tennessee can help guide you to the appropriate investment allocation, personally tailored to your needs and goals.