Risk: Too little or too much?

Investing is as much about understanding ourselves as it is about understanding the markets. In this article, we discuss risk tolerance. Your risk tolerance depends on your risk capacity and your risk willingness and is affected by your age, stage in life, and goals.

How do you hit the sweet spot in terms of risk and return? Markets constantly evolve, and whatever happens out there is beyond our control. However, there is one factor we can control: our own risk tolerance.

In investing, there is no "one-size fits all". Just as our tastes and preferences evolve over time, so do our risk tolerance and our goals. The question at each stage in life is not only whether you’re willing to take the risk, but also how much risk you can take? A little bit of introspection is required to understand where your risk tolerance stands in order to help you decide which investments are the right ones for you.

Here are some pointers to help you determine your risk tolerance.

1. Your Early Years: Laying the Foundation

You’ve just begun your chosen career path, and understandably, you may have limited resources. However, you more than make up for this with a longer time horizon. Time is on your side. Retirement is a tiny blip in the distance, and you’ve got an open sea of options in front of you. This is the perfect time to start laying the foundation. Consider these key points:

Start with a diversified portfolio: At this stage, you can afford to take on a higher level of risk as you have time on your side to recover from potential market downturns. A mix of stocks, bonds, and mutual funds can help you pursue higher returns while spreading the risk.

Embrace growth-oriented investments: Allocate a larger portion of your portfolio towards growth-oriented investments like stocks or equity funds. These have the potential to deliver higher returns over the long term, albeit with increased volatility.

2. Building Your Career and Starting a Family: Balancing Growth and Stability

As you progress up the career ladder and accumulate more wealth, you will be more financially stable to start a family and maybe even make the downpayment for a home. With a home to pay for and a young family to support, you may be less willing to take on bigger risks. These are key strategies you can adopt at this stage of life:

Balance growth and stability: Aim for a mix of growth-oriented investments and more stable assets such as bonds or real estate investment trusts (REITs). This balanced approach can help mitigate risk while still seeking reasonable returns. 

Diversify across asset classes: Expand your portfolio to include a broader range of asset classes, such as international stocks or even alternative investments like commodities or real estate. This diversification can help protect against market volatility and optimise returns.

Regularly review and rebalance: As your financial situation evolves, it's important to periodically review and rebalance your portfolio. Reassess your risk tolerance and adjust your asset allocation accordingly to stay aligned with your long-term goals. It’s easy to get distracted, but don’t lose sight of the end goal!

3. Approaching Your Retirement: Preserving Capital

It hits you every year after you blow out your candles on your birthday cake: retirement is getting closer. Your kids have grown up and are considering taking courses at university that you’ve never even heard of. You and your spouse are discussing where to retire. You are now thinking of switching to a lower gear on your risk tolerance; hence, the focus shifts towards capital preservation and sustainable income generation. Here’s what you can do:

Shift towards income-generating assets: Allocate a greater portion of your portfolio towards income-generating investments such as bonds, dividend-paying stocks, or annuities. These can provide a steady stream of income to support your retirement needs.

Consider low-volatility investments: Reduce exposure to high-risk assets and prioritise investments with lower volatility. This can help safeguard your capital and provide more stability as you transition into retirement.

Plan for healthcare and long-term care expenses: Factor in potential healthcare costs and long-term care expenses when designing your investment strategy. Explore investment vehicles that offer protection and potential growth to meet these needs.

4. Enjoying Your Golden Years: Income vs Inflation

The key word here is enjoying. You’ve done all the hard work to build a comfortable nest egg to settle into, but that doesn’t mean you  have to stop investing. In fact, why should you? Inflation has risen since you first set up your portfolio, so here’s what you need to do to keep it in check.

Lean into those income-generating assets: Ramp up the portion of your portfolio devoted to these investments. You want to preserve capital and generate sufficient income. If you cash out your Employee Provident Fund, the money can be channelled into these investments. Having a predictable and stable income stream is your biggest strength. You don’t want to worry about huge risks at this stage in life.

5. Planning Your Legacy: Leaving a Lasting Impact

Time on Earth may be short, but your legacy is forever. Everything you’ve worked for is for your children and their children. These are good approaches to legacy building:

Plan your estate: Consider tax-efficient and airtight approaches to passing your assets on to the next generation. Ensure that the mechanisms are in place to help them manage their inheritance.

Consider charitable causes: If there’s some to spare, why not share your blessings with those in need? This gives you the opportunity to give back and create a positive impact on society long after you’ve moved on from this world.

Recognising the importance of adjusting investment strategies at different stages in life is essential for financial success. Young investors can embrace higher risk to fuel growth, while those nearing retirement should focus on capital preservation. Striking the right balance between risk and reward is a lifelong pursuit that requires self-awareness and prudent financial planning.

No matter which stage in life you’re at right now, with the right approach, it’s never too late to start. Talk to your Relationship Manager today to discuss your options.

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