Investing is generally critical to helping you meet your financial goals. Especially in times of market volatility, it’s important to carefully review your investing strategy. The choices you make today could have a major impact on your future finances.
When it comes to investing, one of the first things you have to acknowledge is that there are ups and downs in the market, even in relatively stable times. When markets are more volatile, swings can be more drastic and you can either make—or lose—a lot on your investments in a short period of time.
Understanding the level of risk you are comfortable with is critical to determining your investment strategy. Factors that influence your risk tolerance include:
Your comfort with investment risk depends on your financial priorities and goals. If you’re close to retirement and will need to access your funds relatively soon, you may become more risk averse. If this is the case, you may consider adjusting your portfolio to lower levels of risk, or even cashing out on some investments. If you’re far from retirement or other expensive savings goals, and have excess income (funds leftover after living expenses are paid), you may have a higher threshold for risk. In this case, you might lean into riskier investments that could pay much higher returns.
Smart investing involves diversifying your portfolio because different investment vehicles react differently to changes in the market. Investment-grade bonds, which provide lower returns in exchange for a lower level of risk, tend to be a steadier investment. When the market is doing well, stocks and other riskier investments may provide higher returns.
By introducing variety to your holdings, you can set yourself up to weather uncertainty. This balancing act can provide a buffer for riskier investments at any given time.
You can diversify your portfolio:
Diversification can also help you avoid the temptation to try to time the market, when staying invested is generally the best course of action. Timing the market involves trying to buy stocks when prices are at their lowest and selling when they peak—which is no easy task, even for professionals.
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Updated for tax year 2019