Understanding your risk tolerance is one of the most important elements of investing; knowing how your risk tolerance effects your investment decisions is vital to the health of your portfolio.
Have you made up your mind on just about everything, even before you know what it is? For instance, when you meet someone, is your opinion of the person formed from the first impression? Or, when you hear a political argument from the other side, is your mind opened or closed? Are you able to concede the “good points” the other side make, or do you dismiss the whole argument?
If you’ve ever played the Game of Life board game, it becomes clear that compressed into the colorful path there are various stages of life. Each stage holds its own major financial challenges as well as prospective profits in addition to surprises and forks in the road.
After the ball drops on New Year’s Eve, we dig up our hopes & dreams and make some resolutions; getting back in the gym, losing weight, and eating clean, are usually at the top of the list. But what about your finances? The health of your accounts, spending habits, and investments are just as important to evaluate.
Investors are prone to many behavioral mistakes that can cost them dearly. Trying to time the market, trying to pick the winners, chasing returns, trying to go it alone are among the most common. But the one that can inflict the most damage over a period of time is when they succumb to investing inertia.
When it comes to our actions, we rely 99% on our rational decision-making and 1% on our emotions, and it’s often that 1% that actually triggers action. So, instead of following the rational line of thought that we so carefully forged in the left side of our brain, our actions are skewed by whatever emotion is swirling around in the right side.
Asset allocation has become an established investment strategy for those who understand the long term nature of investing and the need to achieve an optimum level of portfolio balance and diversification in order to mitigate risk and achieve more stable returns.