Finance Over a one-year period, what’s the maximum drop in the value of your investment portfolio with which you’d be comfortable? Even the most experienced investors have a “line in the sand” – a number at which it becomes difficult to simply ignore an investment loss. In general, the lower the number, the greater the portion of your portfolio which should be invested in less volatile investments: bonds, GICs and other fixed-income investments. Imagine that your investment portfolio dropped by 20% over the summer. How do you feel about that? The key word here is “feel.” Because managing emotions are such a big part of managing risk, it’s vitally important to understand your emotional reaction tomarket downturns. If the thought of a 20% loss in a couple of months makes you feel ill, that’s a strong indication of a conservative mindset. If a 20% loss makes you excited about picking up assets on the cheap, then you’re the definition of an aggressive investor. Imagine that you find a magic lamp on the beach. The genie inside grants you the ability to completely eliminate one risk from your financial future. So, which one do you choose? This open-ended, “what if ” question can actually tell you a lot about your emotional reaction to risk. Do you find yourself wanting to eliminate the ups-and-downs of the stock market? Or maybe it’s the risk of outliving your money? However you answer the question, it will help you pinpoint the exact area in which you need the most help managing risk. Always remember, there are no right or wrong answers to the questions above – the answers depend on your individual perspective on risk and reward. And, while there are certainly definitive guidelines for the amount of risk which investors should assume, this doesn’t mean that investors who take on more risk are better or worse than others who can’t. At the end of the day, there is absolutely no shame in being a conservative investor, nor is there any “glory” or honour in being able to take onmore risk. What’s most important is that every investor find his or her own individual “comfort zone” when it comes to risk. That’s the best way to ensure the proper balance between investment success and peace of mind. CSANews | SUMMER 2016 | 31
RkJQdWJsaXNoZXIy MzMzNzMx