Managing Your Risk Tolerance Over Time

Managing Your Risk Tolerance Over Time

Common pitfalls and how to avoid them

Most investors recognise and understand the risks involved when investing, however, during times of extreme market decline, even the toughest investors’ risk tolerance is tested.

Such dramatic downturns can force many to limit their risk exposure. But, regardless of market highs and lows, investors can greatly benefit from regular meetings with their financial advisor, who can provide valuable perspective and maintain proper risk to further pursue the long-term financial goals of their clients.

Beware of the hidden risks of low-risk investing – “Low risk” investments help protect one from a decline in the overall stock market, but might leave one exposed to other risks not seen on the surface.

Risk #1: Inflation cutting your real return
After subtracting taxes and inflation, the return one receives from a low-risk investment may not be enough to remain ahead of inflation.

Risk #2: Limiting your portfolio’s growth potential
Beware, some portfolios with low-risk investments may be riskier than one realizes due to the limited growth potential of these investments.

Risk #3: Your income can drop when interest rates drop
If interest rates have dropped by the time a low-risk investment becomes due, one might have to reinvest at a lower rate of return, resulting in a lower yield each month.

Source: MFS Institutional Advisors. “Managing Your Risk Tolerance Over Time”. Fundamental Investing: Strategies for the long term. June 2014.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. Although the information provided to you on this material is obtained or compiled from sources we believe to be reliable, MFS Investment Management, as well as Investors Trust, cannot and does not guarantee the accuracy, validity, timeliness or completeness of any information or data made available to you for any particular purpose.

 

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