Today more than ever, planning for your retirement demands that you stay ahead of the financial factors that shape our economy. With so many different types of investments to choose from, how does an investor determine the best path of wealth creation? Again, it is important to remember that every individual is different and that there is no one model that works for everyone. However, there are two underlying principles to consider when deciding which investment is right for you, Resources and Time.
Resources
On your path to financial freedom, the single most important factor to consider when evaluating your risk tolerance is the amount of money that you can afford to lose. Again, all investors are not created equal. By only investing money that you can afford to lose or afford to have tied up for some time, you won't be pressured to sell off early because of panic or liquidity issues. Stated plainly, the more money you have, the more risk you are can afford. Take the example of Bob Millionaire who can afford to put $5,000 to $10,000 into his investment portfolio each month and has a net worth of over $1,000,000, and compare him to the average investor who can only afford to invest $300 to $500 per month and has a net worth of $100,000. If both invested $10,000 in commodities and managed to loose the entire investment, which investor would be most affected by the loss? Bob Millionaire would hardly take a hit as his loss equates to one month of investment resources, whereas the average investor just lost one-tenth of his entire net worth and over two years of monthly investment resources.
Time
Determining the amount of time that you can afford to keep your money invested is another important factor to consider when evaluating your risk tolerance, especially when it comes to retirement. If you have $10,000 to invest but plan to buy a new home in one year, then investing your money in higher-risk stocks may not be your best strategy. Investments with a greater degree of risk usually carry a greater degree of price fluctuations or volatility. If your time is short, you may be forced to liquidate your investment when the stock price is down translating into a significant loss on the investment. Investors with more time to invest are better able to recoup any possible losses over time and be more tolerant of higher-risk investments.
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Author
Chad Sunyich |
