photo by Fayj
Written by Dave Young, President of Paragon
A 20-year study by Dalbar concluded that between 1987 and 2007 the average investor only earned 4.5%. During that same period of time the S&P 500 returned 11.8%. We all know it is tough to make money during bad markets. But why, even during the best of times, do the majority of investors suffer from poor performance?
One of the reasons is that they don't stick with their investment strategy during difficult markets. When markets go up, investors are attracted to the market and stay invested easily. When the market starts to go down, most investors still stay invested. It's usually after the market has fallen significantly that panic sets in and investors bail out. They usually bail out close to the bottom right before the market starts to rebound. This pattern repeats itself over and over with the result being that most investors are constantly buying high and selling low.
If your investment risk tolerance is set too low, you won't generate the returns you should. If it is set too high, when market conditions become difficult, you will likely sell your investments and miss out on superior long-term returns. Setting your risk tolerance and then aligning your portfolio with it allows you to reduce your portfolio volatility to a level that you can live with.
Before you invest, you need to ask yourself how you will react if your portfolio drops five percent. What about 10 percent? What about 20 or 30 percent? At what point would you want to sell out of your investments and run for the hills?
Once you answer that question, then your portfolio should be invested so you never hit the point that will force you to sell at the market lows. That will allow you to follow your investment strategy over the long-term and be invested when the best opportunities present themselves. It will also allow you to generate the best possible returns over the long-term.
Over my 23 years of wealth management experience, I believe that determining your risk tolerance is one of the most important steps an investor should take.
If you are married, both you and your companion should take the questionnaire and compare the results. Since identifying your tolerance can be difficult, Paragon Wealth Management created a short risk tolerance questionnaire to simplify the process.
Click on the link below to complete a short questionnaire to help you identify your investment risk tolerance.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.