Investment risk is a risk that everyone shares. In order to protect against risk, it is important to have a portfolio of products aligned with your risk tolerance and time horizon is important to protect against market risks. As you age, your time horizon and risk tolerance will most likely change. It is important to review the time horizon associated with each of your goals, and evaluate your true risk tolerance.
One way of evaluating your risk tolerance is the Rule of 100. Use the Rule of 100 to determine the percentage of investments in your portfolio that should be riskier in nature.
How to Calculate Using the Rule of 100
In calculating the percentage of risky investments, subtract your age from the number 100. For instance, if you are 63 years old, subtracting 63 from 100 gives you 37. This means that 37% of your portfolio can be allocated to more risky investments. Conversely, the remaining 63% should be allocated to more secure accounts. This rule is founded on the concept that as you get older, the window of time for recovering from potential losses, like a stock market downturn, becomes narrower.
“Stock market sell-offs have been pretty lackluster in 2021,” says this Forbes article. Accordingly, it may be time to reevaluate your risk tolerance. Read the full Forbes article to learn more.
Conclusion
Above all, calculating risk is crucial in financial planning as it allows individuals to make informed decisions based on potential outcomes. By assessing risk, one can identify and understand the uncertainties associated with an investment or financial decision. This analysis helps in determining the likelihood of positive or negative outcomes. Therefore enabling individuals to mitigate potential losses and maximize gains. Taking calculated risks allows for a balanced approach to financial planning, ensuring that one does not expose themselves to unnecessary financial vulnerabilities. Ultimately, by considering risk, individuals can develop a well-rounded strategy that aligns with their goals and risk tolerance, leading to more effective financial management and long-term success.
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