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Is Your Portfolio in Line with Your Risk Number?

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Investors should consider a customized strategy that includes return expectations.

MoneySmart
By Grace S. Yung

If you have money invested in stocks, you are probably aware that 2017 was a good year for the markets. But investors should never get too comfortable. If you don’t have a high tolerance for risk, this could be a good time to assess—or reassess—whether your expectations are in line with your portfolio.

For years, financial advisors have used various methods of determining risk tolerance. Unfortunately, these methods typically generalize investors into broad categories like aggressive, moderate, or conservative. Even if you are technically in the “right” category, you could still be outside the parameters of your risk preference. And this can affect not only short-term results, but also long-term financial outcomes.

According to the Financial Industry Regulatory Authority, risk is defined as “any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare.”

Oftentimes, financial advisors will try to compensate for risk by diversifying holdings. But while diversification is one way to reduce risk, investors should take things a step further by customizing risk to their needs and goals—much like being fitted for a tailored suit.

Even if you customize your risk, though, categories can be overly broad. However, with a properly constructed comprehensive financial plan, it isn’t necessary to take on added risk to be successful.

The real key is to reduce risk while at the same time maximizing return that is reasonable and comfortable. Just like the engine of a car, the individual parts of your portfolio need to work together to get you where you want to go.

Some investors don’t realize that not having their portfolio in line with their financial goals (both short- and long-term) can be much riskier than a falling stock market. This is why it’s incredibly important to get a true assessment of your tolerance for risk. For example, you may feel that you are okay with taking on more risk to attain more return. But if a roller-coaster market keeps you awake at night, it might mean that you need to pull back.

Setting expectations using risk versus average return can help you anticipate the future. Pinpointing a factor known as your “risk number” allows you to construct a portfolio that contains personalized risk. Setting your portfolio’s return expectations, versus an average return, can lead to more suitable asset allocations.

With that in mind, it is always best to work with an advisor who doesn’t just know you and your financial goals, but who also uses your risk number in combination with their experience to help you navigate toward the best combination of investments. In addition to more closely tracking risk tolerance and preference, this type of analysis can help ensure you are on track over time. For instance, a financial portfolio is never considered “static.” In other words, as your life changes, so will your monetary goals and needs.

Marriage or divorce, the birth or adoption of a child, the receipt of an inheritance or other windfall, the purchase of a new home, and/or a significant job change or promotion can all have an impact on both short- and long-term financials. This is why it’s essential to check your progress and update your risk number as needed.

The “traditional” financial-risk stereotypes have led to tolerance categories carrying less weight for many investors. To truly assess how and where your money should be invested, it can be much more meaningful to use a customized risk-number strategy.

When doing so, it can also be beneficial to discuss your financial goals with an advisor who has a focus on the LGBTQ community, and who is familiar with strategies that can best meet your particular situation. That way, in addition to investing in a manner that more closely fits your specific risk tolerance, you can be more open about who and what truly matters to you.

This article appears in the January 2018 edition of OutSmart magazine.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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