Let your "threshold of pain" drive your risk level in investing

Let your "threshold of pain" drive your risk level in investing
 
When deciding how risky or conservative to be when it comes to your investment accounts, there are many rule of thumb principles out there to sift through. Time horizon for your investments is undoubtedly a crucial factor when it comes to exactly how much risk to encapsulate in a portfolio. Age of the investor is also vital, and that principle piggybacks off of time horizon for obvious reasons.
 
While these general investing principles can guide a new investor to a reasonable starting point, there is a lot more to it than what you "should" do. The most important factor is what you "can" do.
 
Red Oak Financial Group principal, Christopher Compton, likes to use the phrase "threshold of pain" with clients as he describes how much volatility an individual can withstand on a short-term basis. General investing principles provide that for a greater level of assumed risk, the greater the long-term return expectation. However, with potential for greater returns comes the increased possibility for red numbers. While the S&P 500 has averaged approximately 10% per year for many decades, it has been victim to declines in the index of 20%, 30%, even 50% or more on occasion in any particular year. Can you withstand that level of "pain" in any given year in order to increase expected return over the long haul? Well, it is easier said than done, and the absolute worst action an investor can take is to continually attempt to time the market by bouncing in and out of investments on a systematic basis.
 
So, what is your "threshold of pain?" You may be young, but if you get easily spooked by downward volatility to the point where you are prone to making potentially hazardous financial decisions, it may be more effective to take on less risk than some of your contemporaries. By doing so, you can make sure you are positioned in a manner that you can withstand through the inevitable "bad times." On the opposite side of the coin, if you are of older age but have a very high "threshold of pain" where economic and market downturns don't trigger irrational decision making, maintaining a more risk-on investment style could actually be appropriate for your personal situation.
 
Everyone's background and circumstances are unique to them. People have different stresses in their lives and various emotional triggers. There is no right answer when it comes to how much risk to pursue in an account, and age and time horizon are only a couple of factors (albeit important). Try thinking of your own "threshold of pain" when it comes to investing, and do not go beyond that level or it may cost you down the road. #financialplanning #investing #investingtips
 
Consult your financial professional for more information.
 
-Your friends at Red Oak Financial Group