Often when we sit down with investors and talk about their risk tolerance most people will nod and say they are comfortable with some risk. We poke and prod a little through our conversation to see how someone might tolerate investment dips along the way. We are looking to find that sweet spot that tells us someone’s ideal risk tolerance comfort level.
Some might say we’re trying figure out if you have the time and the stomach for the ride.
If I were to draw a picture of what that ride might look like at any given risk tolerance level, I would draw a line moving in a general upward trend with bumps and dips along the way; some small and some larger. When you look at this hypothetical line illustrated in a big picture timeline it makes sense and it’s easy to feel good about it.
Eventually, a bump in the road comes along and presents us with a rocky part of the journey.
As investments grow, investors are happy and at ease. Eventually, a bump in the road comes along and presents us with a rocky part of the journey. Seasoned investors can roll with the bumps and dips quite well, but this is not the case for everyone. New investors in particular can be caught off guard when they experience their first bout of volatility.
It can seem so easy in theory when we look at the big picture and yet feel so different when it’s your own hard-earned money.
An investor can easily lose sight of the long-term journey. What makes matters more difficult is sometimes these rough patches will coincide quite neatly with a quarterly or year-end statement in such a way that presents an alarming short-term snapshot.
The statement reflects only one small part of the long-term trend of your investments. But in that moment when you look at your statement it is easy to forget that it’s only a short-term snippet reflecting a quarter or whatever the timeline may be. In that moment, the long-term perspective can be upstaged by a shorter window of time. In that moment, if that dip is perceived as significant enough, your emotions may kick in and fear could replace logic. In that moment, one of these dips you thought you could tolerate starts to scare you.
Sometimes these rough patches will coincide quite neatly with a quarterly statement in such a way that can present an alarming short-term snapshot.
I often draw this picture for new investors on the outset to remind them that one day this may happen to them where they may feel uneasy with a particular bump in the road along the way. Perspective comes in handy for an investor seeking reassurances. I say this on the basis the investment portfolio has been well crafted and diversified to meet needs.
If you find yourself uneasy with a worrisome statement along your investment journey that has you rattled, remember to take a step back to gain perspective. Don’t make rash decisions. Investors make the worst decisions when they are fueled by emotion and fear. Portfolio tweaks and adjustments should be done with a sound strategy in mind, not driven out of fear. Keep a level head and your eye to the future.
It can be easy to let one small piece of the timeline throw you off your investment strategy. Investment values go up and down, it’s the very nature of the market. Investors will do themselves a favour if they take a moment to stop and remember short term reports reflect merely one small part of a long journey. Maintaining a long-term perspective and keeping your end goal in mind will help you stay the course with ease.
Stephanie Farrow, BA., CFP., Stephanie has over 28 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.
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