Investing • Consider how much you're willing to lose.
This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Salt Lake consultant Sean P. Lee, president and founder of SPL Financial, Inc., says many investors question whether it's time to allocate more money in the markets or if it's time to get out.
Is now a good time to invest?
Whether now is a good time depends on your specific financial situation and goals. If you're still in the workforce and are more than five years away from retirement, you're probably in the "accumulation" phase of your financial life. This means your investment strategy should be focused on growth. In this current financial climate of low interest rates, one of the most effective strategies for growing your money is to invest in the stock market. Those approaching retirement or considering a large purchase, however, should be wary of high-risk investments. The less time you have until you retire or make your purchase, the less time you will have to recover from a loss if the market drops. Even though the market has generally been on the uptick in the past few weeks, stocks are still volatile and there is no way to know how long positive trends will last.
How can investors calculate their risk tolerance?
If you're unsure how much money you can have invested, try the Rule of 100 subtract your age from 100, and the difference is the approximate percentage of your portfolio that may be appropriate for higher-risk investments. Remember, though, that this is just a rule of thumb, not a hard and fast standard. Also consider how strong your stomach is and how much you are actually willing to lose. Even if your time line to retirement says you could invest more, if you aren't willing to take the risk, then don't subject yourself to volatile investments.
How can investors protect themselves from the economic environment?
First, create an investment plan that identifies your financial goals and limits. A well-researched strategy can put you on the path toward achieving your investment objectives. When building your portfolio, be sure it's both diversified as well as incorporates a number of different investment vehicles the better diversified a portfolio, the more protected it is from significant losses. Don't put all of your eggs in the stock market basket, and be sure that some of your savings and investments are protected and positioned to withstand any market dip.
What should investors do to limit their exposure to risk but still take part in the upside potential?
Every investor is different. What one person considers "risky" another may consider conservative but there are financial products that are considered less risky than individual stocks. Funds such as mutual funds or exchange-traded funds are comprised of multiple investments; the goal is to diversify within the product itself so the investor is exposed to less volatility. Other ways to participate in the upside are through market-linked products such as market-linked CDs, life insurance or fixed indexed annuities. These financial products are typically considered "safer" than stocks, mutual funds or ETFs (Exchange Traded Funds) because the principal is usually protected. The earnings of the product are linked to a market exchange and interest is credited to the account based on market performance. However, there are some downsides to these investments. Typically your money is invested for a specific period of time, and in some cases you do not get to lock in all of the upside. The appropriateness of these products will depend on your financial situation. Sean P. Lee, retirement coach