Ready for Stock Market Risk? Go Back to Basics to Find Out
If the market’s record-setting run has you a bit nervous, it’s time to get real about risk.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
How confident are you in your ability to make the right choices for your retirement investments?
Last year, when the Federal Reserve Board released its “Report on the Economic Well-Being of U.S. Households” (based on surveys from 2015), it found that 49% of all respondents with self-directed retirement savings were “not confident” or only “slightly confident” about making the right decisions.
That we’re in the ninth year of a bull market is only adding to people’s doubts about what to do next. Even experienced, hands-on investors can’t help but ask how long the record-setting good times can last. Should they stay or should they go?
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re feeling uncertain about your plan – or if you’re just getting started — it’s always good to go back to the basics to determine how ready you are to deal with any future market fluctuations.
1. Start with the big picture.
Think about your time horizon (how long you have to invest), your net worth, income, expenses and then — keeping all that in mind — how you feel about risk.
Most advisers talk about “risk tolerance” and put that in terms of a percentage. “Can you deal with a 10% drop?” they’ll ask, and because 10% doesn’t sound like much, most investors will say yes.
I prefer to talk about real dollars. If you have a million-dollar portfolio, for example, and I ask if you’re OK with losing $100,000, your mindset probably would start to shift a bit. Taking it a step further, I might ask how long it took you to save that $100,000, and how many years of income that much money might have provided in retirement. This gives a much clearer picture of the magnitude of a major market fluctuation.
2. Next, think about what you want to accomplish at this stage of your life.
If you’re looking to grow your money, you may want to shoot for higher returns. Just remember, the higher the return on your money, the more risk you’ll have to take to get it.
If you’re close to or in retirement, you’re likely more interested in the return of your money. With an income-focused portfolio, you won’t see the big highs and low dips, but you should see higher yield and/or a consistent level of income.
You may wish to design a plan in which you have both a return of your money for income and a return on your money to help outpace inflation.
3. Finally, put it all together, keeping these questions in mind:
- What’s your fluctuation comfort zone? How comfortable are you with the prospect of losing money in a market correction or downturn?
- How much can you really afford to lose? Don’t forget to transition down the amount you set aside for growth as you get closer to retirement.
- Are you confident in your financial strategy? Is your strategy clearly defined, and does it coordinate with your income plan?
- Have you established your “uncle” point? Experiencing some discomfort when the market drops isn’t the same as knowing when you’re truly done. At what point will you say, “You know what, I’m out. I can’t take it anymore. I’m selling.” Knowing this number can keep you from making knee-jerk decisions based on emotion, but also from hanging on too long if the ship is going down.
A knowledgeable financial professional can help you draw up a realistic plan that will help you reach your retirement goals. But it’s up to you to clearly and honestly establish your boundaries. If you find yourself fretting about the moves you’re making in the market, take some time to re-examine your motives and your mindset.
Kim Franke-Folstad contributed to this article.
-
Nasdaq Leads a Rocky Risk-On Rally: Stock Market TodayAnother worrying bout of late-session weakness couldn't take down the main equity indexes on Wednesday.
-
Quiz: Do You Know How to Avoid the "Medigap Trap?"Quiz Test your basic knowledge of the "Medigap Trap" in our quick quiz.
-
5 Top Tax-Efficient Mutual Funds for Smarter InvestingMutual funds are many things, but "tax-friendly" usually isn't one of them. These are the exceptions.
-
Social Security Break-Even Math Is Helpful, But Don't Let It Dictate When You'll FileYour Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.
-
I'm an Opportunity Zone Pro: This Is How to Deliver Roth-Like Tax-Free Growth (Without Contribution Limits)Investors who combine Roth IRAs, the gold standard of tax-free savings, with qualified opportunity funds could enjoy decades of tax-free growth.
-
One of the Most Powerful Wealth-Building Moves a Woman Can Make: A Midcareer PivotIf it feels like you can't sustain what you're doing for the next 20 years, it's time for an honest look at what's draining you and what energizes you.
-
I'm a Wealth Adviser Obsessed With Mahjong: Here Are 8 Ways It Can Teach Us How to Manage Our MoneyThis increasingly popular Chinese game can teach us not only how to help manage our money but also how important it is to connect with other people.
-
Looking for a Financial Book That Won't Put Your Young Adult to Sleep? This One Makes 'Cents'"Wealth Your Way" by Cosmo DeStefano offers a highly accessible guide for young adults and their parents on building wealth through simple, consistent habits.
-
Global Uncertainty Has Investors Running Scared: This Is How Advisers Can Reassure ThemHow can advisers reassure clients nervous about their plans in an increasingly complex and rapidly changing world? This conversational framework provides the key.
-
I'm a Real Estate Investing Pro: This Is How to Use 1031 Exchanges to Scale Up Your Real Estate EmpireSmall rental properties can be excellent investments, but you can use 1031 exchanges to transition to commercial real estate for bigger wealth-building.
-
Should You Jump on the Roth Conversion Bandwagon? A Financial Adviser Weighs InRoth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
