Part of assessing your risk tolerances involves measuring your comfort level. You should examine what you feel about volatility, but also make sure that you can withstand all the interest rate scenarios that a particular asset class provides.
So if you lose 43% of your wealth in a year scares you, a portfolio of 100% stocks is probably not a good fit. And a model with a slightly lower average return, but lower potential losses, is likely to make you more comfortable.
2. Rebalance your portfolio
As the stock market performs well or poorly, your asset allocation model may change over time. This can result in you being either too aggressive or conservative in relation to the model you chose. For example, let’s invest $ 100,000 in 70% equities and 30% bonds in early 2008. That year was not good for stocks (darn you, big recession!), And $ 70,000 was liquidated with $ 44,100 off at the end of the year. Bonds did better by winning just over 5% and turning $ 30,000 into $ 31,572. So in early 2009, an unchanged portfolio would be 58% equities and 42% bonds.
In 2009, equities began to recover from the Great Recession and performed well. If you left your 2008 allocation of assets alone (58% equities / 42% bonds), you would have seen a 17.87% return in 2009. That’s a decent return. But if you adjusted your portfolio allotment back to 70% equities / 30% bonds, your return in 2009 would have been more like 20.35%. Using our hypothetical figures, rebalancing the hypothetical investor does not cost $ 1,877 in potential returns as of 2009.
Disclaimers for mcutimes.com
All the information on this website - https://mcutimes.com - is published in good faith and for general information purpose only. mcutimes.com does not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information you find on this website (mcutimes.com), is strictly at your own risk. mcutimes.com will not be liable for any losses and/or damages in connection with the use of our website.