As we know from history and our own experience, when equities enter a period of extended volatility or loss, it can be detrimental to our financial and mental well-being. Your composition of stocks and bonds makes up what is called your asset allocation. Determining the appropriate asset allocation for our clients is an important step of the financial planning process. We do this by trying to understand what our client’s risk comfort level is, often referred to in the industry as risk profiling.
We believe your risk profile is determined by many factors:
Your risk profile is not something that should change annually but rather be reviewed as you achieve milestones in your life. When clients move from the phase of asset accumulation to asset distribution, the ability to handle volatility may not be the same as when you were working. Retirement is a good example of when your risk profile should be evaluated.
When your risk profile is in line with your asset allocation, periods of market volatility can be weathered with a much calmer approach. This can help ensure that you stay on the guided path of your financial plan and without making knee-jerk decisions that may compromise your financial success.