Educators take pride in their investments and enjoy putting their money to work. Assessing risk tolerance and finding your comfort level with volatility will go a long way toward helping you reach the level of financial security you desire while weathering the ups and downs of the market.
No investment strategy can guarantee a profit or protect against a loss, but answering a few simple questions can help you determine if your portfolio matches your needs and expectations.
1. What is my risk tolerance? Your financial plan should be designed based on the risks you're willing to take to meet your goals. Is your investing style conservative, moderate or aggressive? In general, there is a relationship between risk and return. The greater the risk of loss, the larger the potential for a significant return. Your tolerance for risk will determine the boundaries for appropriate investments.
2. What is my time frame? The length of time that investments will be held is one of the most important factors in any financial plan. Investing in low-risk cash-equivalent investments such as short-term Treasury securities may not achieve a rate of return higher than inflation. Even though your principal may remain intact, your purchasing power can be reduced due to inflation. The risk of volatility impacting your ability to achieve positive long-term results by investing in stocks lessens as your time horizon increases. Historically, stocks tend to outperform other investments and achieve a rate of return higher than inflation over long periods of time.* This makes stocks, or funds that hold stocks, attractive for retirement planning because of the long-term investment horizon.
3. When and how do I plan to use the money? Determine how long you plan to invest, what you are saving for and when you will need the funds to meet your financial objective(s). You must decide, based on the time horizon and your objectives, whether to allocate your assets to short-term investments, long-term investments or some combination of the two.
4. How much money do I want or need? Setting a financial goal will help determine what level of risk you may face. Beginning to invest for retirement late in life may require an aggressive approach and additional risk, while a young adult may invest more conservatively and retire with a similar nest egg. However, given that a younger investor typically has a much longer time horizon before retirement, they are better suited to pursue an investment strategy that has the potential for higher returns, while increasing the possibility of short-term volatility and/or investment losses.
5. What other savings and investments do I have? Different categories of investments (stocks, bonds and cash equivalents) typically do not all perform identically at the same time. For example, stocks and bonds often react differently to the same economic or political news. By spreading investments among various asset classes, a portfolio is better prepared to handle the ups and downs of the markets.
Weigh Your Options
Review the investment options available in your 403(b) plan at 403bcompare.com.
* Past performance is no guarantee of future results.