Profit and Risks: How do you manage?
Your goal as an investor is to make your money work for you. However, it’s important for your own peace of mind to assess your risk tolerance and determine what kind of profits you’re looking for before you decide on an asset allocation strategy.
Risk and reward usually go hand in hand. Investing vehicles, like stocks, allow for high potential returns, but also carry higher risks. Products such as certificates of deposits and savings accounts are at the low end of the risk spectrum, but do not allow for large profits.
Diversification across asset classes and within asset classes needs to reflect your attitude towards risks.
As you approach retirement, losing a large portion of your portfolio would be a disaster you might not recover from. So it’s smart to gradually allocate a larger portion of your portfolio to safe investments you can rely on for regular payouts. A smaller portion should be dedicated to equities to still gain exposure to potentially high returns without risking too much.
If you are still years away from retirement and have a small portfolio as well as a regular source of income, taking risks is a good strategy. You will have years to recover from a loss and grow your portfolio.
Allocate your assets to different classes within these ranges in view of how aggressive or conservative your approach to investing is:
- Equities should account for anywhere between 50% and 90% of your portfolio. Some experts recommend following this formula: Take 110 and deduct your age from this number to get an idea of the percentage of stocks that might work well for you.
- Cash equivalents. Allocate 20% of your portfolio to cash equivalents if you adopt a conservative approach. If you’re looking for quick growth, this asset class can be missing from your portfolio.
- Fixed income securities. Allocate 40 to 60% of your portfolio to fixed income securities if you will rely on that income during the next few years. If you’re focused on aggressive growth, fixed income securities might account for as little as 10%.
I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.” -Warren Buffett