Balancing risk and long-term goals

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Q. I’m 30 and I know I have to take risk in the stock market because I have a long time to go before I retire. How can I decide how much risk, and what kinds of investments should I use?
— Planning

A. How much risk you need to take to reach your goals is an important part of your financial plan.

You didn’t say if this was a retirement account or a non-retirement account.

In a retirement account, the goal is to save and not use the money until you are retirement of age 59 1/2 or beyond, said Anthony Tomaro of Tomaro Financial Group in Wall.

“Because of the long-term time frame of the investment and due to your age, the portfolio should have the majority of your investments in equity,” Tomaro said. “Historically, equities have outperformed cash, commodities, and bonds and would be the best investment for reaching your retirement objectives.”

For a non-retirement account, you will probably access your money for something in the future so it is important to ask yourself what your short-term and intermediate goals are for that given account, he said.

These answers will probably dictate how much risk and equities you would have in that particular portfolio.

Next, you should consider your personal risk tolerance.

Tomaro said there are certain people who have high risk tolerances and are okay with market fluctuations, while there are others who avoid the market or look at their investments every day and panic.

“It’s important to understand that for yourself and to know how much risk you can truly tolerate,” Tomaro said. “One of the biggest mistakes that people make is to panic, sell when the market is down, and don’t get in soon enough for the recovery.”

Building a portfolio to your comfort level will hopefully help avoid this emotional scenario that leads to this type of destructive behavior, Tomaro said.

Then you need to consider the objective you’re trying to meet with the investment.

Tomaro said with a retirement account, you know your objective is to save for retirement and that you have a long-term time frame. This portfolio should have more equity in it, he said. As time passes, portfolio adjustments should be made and less risk should be taken as you get closer to retirement.

On the other hand, with a non-retirement account, you may have an objective to buy a house in five years, upgrade your house, or some other large financial objective.

In these scenarios, it’s important to consider time frames in conjunction with risk, he said. In the five-year scenario, you may decide to invest much more conservatively.

He offered this example: Say you started investing in all equities in 2005 with the objective of putting a down payment on a home. In 2008 and 2009, the credit crisis hit and world markets took a huge hit. The S&P 500 fell over 50 percent from its previous high. If you were looking to put a down payment on a home for $50,000, you would have a lost a large portion of your investment, meaning you wouldn’t have the money you were hoping to have for the down payment.

Risk is personal, Tomaro said, and you should be aware of your own personal emotions to help you determine how much you can personally assume before throwing in the towel and avoid investing or making detrimental decisions.

“The longer the time frame you have, the more you should embrace equities and the inherent risks associated with them,” he said.

And even when you should have more equities in your portfolio, you should structure a portfolio that is diversified, balanced, and does not take unnecessary risks, he said.

“A typical retirement portfolio for your age would fall between 60 and 100 percent equities and where you fall on that scale should account for your comfort level,” Tomaro said.

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This post was first published in September 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.