If I asked you, “How much money do you want to lose in a risky investment?” you would probably think this was a strange question. However, you must consider the risks before you invest.
When you put money in the stock market you give up the certainty in return for the potential reward of growth. By choosing a risky investment, you bet that the potential for high profits is greater than the possibility of losing your money.
Too worried to invest?
Let’s say you worry a lot about risk and decide to go for “conservative” choices. Even choosing “safe” investments entails a level of risk – the risk that the investment’s return may not beat (or even meet!) inflation. Inflation means you lose purchasing power, which is a real loss.
Recently, I spoke with someone who invested in a single stock, the price of which tumbled. He now needs to decide whether to keep the stock, sell, or buy more. If he believes in the strong fundamentals of the company and is prepared to wait until prices rise again, it may be an easy choice. What would you do? Ask yourself this question every time you check your account statements.
Prepare for losses as well as for gains
Benjamin Franklin said, “In this world, nothing is certain, except death and taxes.”
When designing your portfolio, consider setting loss parameters. Use real figures when planning, like, “If the market crashes and my portfolio drops by $100,000, what would I do?” At the same time, you can think about the opposite scenario: “If I achieve my goal of building up a million dollar portfolio, then what?”
While it would be nice to only focus on possible gains, by thinking about what you can afford to lose as well, you get a more realistic view of the bigger picture and can plan your investments accordingly.
For tips on how to assess your risk tolerance when looking at a possible investment, click here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published June 25, 2018.