Investing is comparable to a roller coaster ride. It’s filled with ups and downs and can appear overwhelming at times. There will be moments of thrill and moments of fear. Your decisions during the process will impact your financial wellness and retirement readiness. Wherever you’re at in the ride, there are important considerations to acknowledge during the process.
One of the first steps to investing is determining your risk capacity and risk tolerance. Risk capacity – how much investment risk you’re able to take on – depends on your unique financial circumstances. Risk tolerance refers to your willingness to take a risk. Think of tolerance as to how big of a loss you’re willing to take without making any investment changes. To determine your risk tolerance, you can utilize the Full Picture report builder, available through your myMERS account. This retirement planning tool offers a risk tolerance assessment that gives you personalized guidance when it comes to making investment decisions.
Picking Your Ride
Your risk tolerance and goals will, in part, determine your asset allocation. A greater bond allocation will provide you with lower, but stable, investment returns. Higher equity allocations will likely result in bigger, but more volatile returns. A common rule of thumb for determining asset allocation is the “100 minus your age” rule. Subtract your age from 100, and that number represents your allocation to equities. For example, if you’re 40, the rule would direct you to have a 60% equities allocation and a 40% allocation to bonds. Although this is only a rule of thumb, it can help you determine an appropriate allocation.
Keep Calm and Enjoy the Ride
With an allocation strategy in place, it’s important to stay calm in times of volatility. Downturns are an inevitable part of the investing process, as are market rallies. By not panicking and selling off during downturns, you’ll reap strong returns once the market rallies. While it’s important not to panic during volatility and uncertainty, you will need to reassess your portfolio as your circumstances change. In the long run, if you stick to your strategy and keep calm, chances are you’ll have an enjoyable and profitable investment ride.