When you fight a videogame boss, do you go full Leeroy Jenkins or do you grind until your character is 20 levels OP?
To match your brashness of gameplay, your investments really need to suit who you are as a person.
What does this even mean?
Well, I’m talking about the HODLers of today who put it all in on Bitcoin vs. the people who prefer to stash cash under their mattresses.
For each person, there’s an ideal level of risk you should take on in order to achieve an ROI to get you to your goals.
How we do this is called…
Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.
Investopedia
Now that I put you to sleep, try to think of it like a character build – how much you put into strength / dex / vitality will probably make you OP for certain bosses and struggle against others.
Essentially, we’re trying to split your portfolio into the right stats to match the challenges you’re going to face in the market.
To break it down one by one, we figure out your goals for your life, family, and business at the start of the financial planning process.
And typically before you even become a client, you’re gonna take our risk tolerance quiz – which is a quick little questionnaire that spits out a score to help determine your willingness to lose some or all of an investment in exchange for greater potential returns.
Which, by the way, I love this quiz and you can take it yourself here.
Finally, investment horizon is the length of time that you’re willing to hold the portfolio and is usually proportionate with the amount of risk you’re willing to undertake.
What can you even allocate your portfolio to?
When people talk very generally about “investing” and your “portfolio” they’re probably referring to how you’re split up between 3 large asset classes –
- Stocks,
- Bonds, and
- Cash equivalents.
This is really just describing how to invest in the stock market – I think there’s a couple other asset classes folks should hold, but we won’t go that in depth here.
What happens if you’re not in the appropriate allocation for your risk tolerance?
Having the appropriate allocation for YOU is viewed as one of the, if not THE, most important factor of your investment results.
In other words, Investors may use different asset allocations for different objectives.
Someone who is saving for a new car in the next year, for example, might invest their car savings fund in a conservative mix of cash, certificates of deposit (CDs), and short-term bonds.
This helps mitigate market risk – if you’re too aggressive for such a short timeframe, when the time comes to buy your car the money may not be there at a specific time if the market fluctuates.
Someone who is saving for retirement that may be decades away typically invests the majority of their portfolio in stocks, since they have a lot of time to ride out the market’s short-term fluctuations.
Risk tolerance here means that someone who is uncomfortable investing in stocks may put their money in a more conservative allocation despite a long-term investment horizon.
This is partly why the financial planning process takes place over 4-5 meetings. Starting with a well-thought-out plan puts you in the best position possible to meet your goals.
RECAP
If I had to summarize this topic in one sentence, I’d say that one of the most important ways to achieve your financial goals is making sure that WHAT you’re investing in needs to match your risk tolerance and timeframe.
Again, here’s the risk tolerance quiz – let me know what your score is and your options to invest based on that!
I love this risk tolerance questionnaire so much, if you want to take it yourself the link is in the video description below!
