Taking a goals-based approach to investment risk
The real measure of risk is whether or not you reach your financial goals.
While investors may view risk in a number of ways, the perspective you take should help guide you toward your long-term goals.
Typically, investors measure risk by comparing performance to a market index (or benchmark), such as the S&P 500 or NASDAQ. So, if it was a tough period and the benchmark was down 10% but your investment portfolio was down 8%, you “outperformed.”
Relatively speaking, that’s not bad. Yet the fact is you’ve experienced a considerable loss in capital, which may put one or more of your financial goals at risk. Especially for those fast approaching a major financial milestone, such as retirement, there’s not much comfort in that type of standard.
Goals-based investing keeps your future in sight
Another approach – likely to provide you with a more helpful long-term perspective – is to look at risk in a personal way. That is, risk can be based on your unique life goals (rather than the market alone) and the probability of meeting or falling short of those goals. This is better known in investment terms as a goals-based approach. After all, investing should be about achieving the future you want, whether it’s affording a satisfying retirement, your children’s education or a major home renovation.
Your advisor can help you integrate this approach. First, we review your financial profile and short- and long-term objectives. From there, we can build a portfolio that puts you on track by, perhaps, funding and investing in each goal independently. Each goal could work in aggregate as part of a whole portfolio, while having unique time horizons, asset allocations or risk profiles. This is one possible approach, among others, to goals-based investing that we could use.
Gauging portfolio risk and performance, then, is a matter of tracking the total returns of your portfolio (not the relative returns compared to an index) and determining whether or not your goals are within reach.
Navigating market volatility to meet your goals
Achieving your financial goals – especially your long-term goals – through investing requires a highly disciplined approach that can navigate the ups and downs of the market. Your advisor can help you maximize returns and minimize losses by integrating a number of important investment techniques, such as:
- Diversification– Certain investments, asset classes or market segments perform better at different times. It’s important to avoid concentrating your portfolio in one particular area only, since you will risk missing out on attractive investment opportunities in other markets.
- Investing early– To reach your long-term financial goals, you need to begin investing as early as possible and for the long term. This will help you compound your earnings as you generate more returns on your asset’s reinvested earnings over time.
- Systematic investing – Making regular investment contributions, instead of random ones, can help build your wealth in a disciplined manner while keeping you invested through all market conditions to enhance your long-term growth potential