By: Tony Christensen 1/12/17
The beginning of a new year brings excitement about change, getting organized, and accomplishing more. Typically, a large focus is placed on the topic of personal finances with a hope to increase efficiency. Entering 2017, there are several factors to consider. President-elect Trump will be bringing an entirely new style with new procedures and governmental involvement. So far much of the corporate world seems to be receiving him well and this may drive growth and prosperity for much of the early 2017 year. However, if the Fed ends up having a lot of push-back against this change, we could be in for some market volatility. It will be vitally important as you set goals this year to consider if your portfolio is in in-line with your risk tolerance. Risk tolerance is another way of assessing how much volatility you can handle over a period of time in order to achieve what you want. I often refer to risk tolerance as “risk budget”. Each person must assess what they are willing to pay to get what they want. It’s like buying a car. Most of us want the nicest car on the lot, but are we willing to pay the price? Similarly, we all want the highest rate of return, but are we willing to pay the volatility price, which brings higher ups and downs, that comes with it?
In our industry, it is common place to measure performance against a benchmark like the S&P500. Although it’s important to measure our performance, it can cause issues for many investors. The S&P500 or DOW Jones is constantly blasted on the news, radio, and other media. Thus, it’s the measuring stick that almost every investor uses to evaluate their portfolios performance. As you can imagine, this is a dangerous way to analyze for several reasons. To compare, it would be like an individual that can afford a Ford Focus but wants the features and performance of his neighbors Mercedes. What happens when he/she buys the Mercedes instead of the Ford? I’ve seen this happen and it’s not pretty. The excitement of the Mercedes loses its appeal quickly. The realization sets in that he/she cannot afford the Mercedes and it starts to cause a loss of sleep. Finally, he/she decides it was a poor decision and the car is sold for much less than purchased, causing an unnecessary loss. We must be honest with ourselves in determining our risk budget / ability to handle volatility, or it will come back to bite us.
As you bring in 2017, re-evaluate your risk tolerance and make the necessary changes. Be cautious when measuring your performance against benchmarks. Always remember, the best benchmark to measure is the quality of your life!
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