You are probably familiar with the story of Goldilocks and the Three Bears. After trying porridge that was too hot and too cold, she finally found one that was “just right.” The same idea can be applied to building an investment portfolio. Almost every investment allocation recommends owning some stocks. Due to their volatility, owning stocks can cause emotional reactions for investors. When the market is roaring upward, people want to own more of them and when the market is in a downward spiral, it is human nature to want to sell stocks. If you invest emotionally (buying high and selling low), you will probably end up frustrated with your poor results. Working with an advisor who understands your goals and your risk tolerance can help take the emotion out of investing. A good portfolio manager will adjust allocations slightly based on market conditions while keeping a close eye on your long-term stock allocation target.
Applying your investments to your individual financial plan can help guide you toward the right allocation by giving you a confidence level that ties your goals to the level of risk you take. Ideally you want to invest in a way that gives you a high probability to reach your goals with the lowest amount of volatility. If you can have a 90% chance of achieving your goals with a relatively conservative portfolio going into retirement, you may not benefit from being more aggressive. On the flip side, wouldn’t it be helpful to know you are not going to have a realistic shot to meet your goals because you are being too risk adverse?
When it comes to investing, you may be in a situation where your portfolio has too much (too hot) or too little (too cold) allocated to stocks. Both scenarios can be dangerous for your long-term success. Working with an advisor who understands your goals and your feelings about risk can help you develop a plan and investment strategy that is “just right” for you!
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