Managing and Judging Risk

This is part 3 of 8 blogs on what today's smart investors need to know in order to create sustainable wealth for you and your family.

Many investors do not understand risk when investing. Generally, the longer the time horizon, the more risk you can take.

If you need money in the next 5 years, you should not be taking on long term risk. Best to keep the money in CDs and bonds so that it will be there when you need it. Don't put your financial future at risk by "betting the house"

Conversely, many investors also take too little risk. They focus on the short term volatility of the market rather than the long term growth potential. These folks typically invest in only money markets, CDS, short term Treasuries etc... even thought their time horizon is 20 or 30 years out. The result is that their portfolios may not even keep up with inflation so their purchasing power is greatly eroded. They will not achieve their desired lifestyle.

A good financial advisor can help you evaluate the risks in your life and design an asset allocation strategy based on your goals, time horizon and the amount of risk that is needed to achieve your desired outcome.

Bottom Line: Understanding your exposure to risk---as well as your time horizon and goals---can help you better protect your portfolio and make better investment decisions.