**This is a sponsored post written by me on behalf BMO InvestorLine.
The idea of an investor’s risk tolerance can be kind of tough to define and is even more difficult to accurately determine.
The problem is that when the stock market is doing well (aka “a Bull Market”) we’re all much more likely to say that we’re fine with risk. You hear a lot of “average investors” say things like, “The stock market goes up and down, but over the long run I know I’ll do well. Buy low and hold or sell high, it’s really not that hard.”
However, when market chaos like the storm we saw in 2008/2009 hits (aka “a Bear Market”), these same investors might be heard muttering things like, “The sky is falling, the market could go to zero, I just saw 45% of my retirement go up in smoke – I can’t sleep at night and I’m nervous all the time.” Suddenly risk can morph into a terrifying reality.
While I am not a fan of some of the high fees traditionally associated with investment advice compensation models in Canada, there is no doubt that investment professionals can add a ton of value if they are successful in moderating clients’ irrational behaviour when it comes to buying and selling stocks, bonds, and ETFs. Getting people to see past the attention-grabbing newspaper headlines, loud-mouthed TV “experts”, and the very recent happenings in the stock market, can be quite difficult. Investors can quickly erase the majority of their gains if they give in to the pervasive whiplash mentality that seems to permeate the world of wealth management. In an ideal situation, investment advisors can help cut through the noise, help investors understand their true risk tolerance over the long term, and act as a buffer against the emotional peaks and valleys that can quickly erode a portfolio’s value.
Acting As Your Own Advisor and Emotional Buffer
All of that being said, investment advisors can cost a lot of money – money that might serve you better by staying in your investment account – provided that you can become your own advisor and adapt to online investing.
Never before have investors had the access to the world’s stock markets that we now have at our fingertips. You can now login from any device, at any time, from anywhere in the world, to buy and sell everything from standard old Canada government bonds, to exotic leveraged commodity ETFs. That is a massive opportunity – but it’s also a massive temptation. If you don’t know yourself and your overall investing plan, all it takes is a few minutes of impulse and a couple of taps on your cell phone, and you can sabotage an otherwise sound series of investment choices. There is no middleman to tell you to sleep on it or to direct you to reading material that should be considered before making a choice.
No One Should Care About Your Money More Than You Do
If you’re willing to embrace the opportunity and responsibility of online trading – congratulations – you are ready to make the leap into directly controlling your own financial life (and save a pile of money in the process). When you’re ready to start making this transition, one of the first things you should look at is your risk tolerance. Your attitude toward investment risk will go a long way to determining what percentage of your portfolio should be in relatively volatile assets like stocks, and what part of your investments would be better placed in something relatively stable such as government bonds.
There are many different online tests available for determining the appropriate level of risk in your portfolio; however, these tests are only as good as your ability to answer them honestly. In an environment like our current thriving stock market, it can be easy to forget just how painful it would be to see your hard-earned nest egg seemingly evaporate in a matter of a few short months.
Back in 2007-2009 the Dow Jones Industrial Average (“The Dow”) went from 14,164.43 on October 9th, 2007, to 6,594.44 on March 5th, 2008. For those of you keeping score, that means that thirty of the largest US companies (as a group) lost more than half of their value in 18 tension-filled months. If you’re going to be honest with yourself and truly understand the best risk level for your portfolio, you really need to think about the emotional pain that could be experienced when (not “if”) that happens again. Will you be able to rationally think about the strategy that you put in place when everything was calm and humming along? Or are you more likely to massively worry about the future and make suboptimal decisions? Please don’t think that falling into the latter category makes you somehow weaker or less intelligent – it definitely does not! It simply means that you are being truly honest with yourself and that you should have a sizable chunk of your portfolio in non-stock market investments such as government bonds. It also might mean that you’re better off with a robo advisor such as BMO SmartFolio than with a DIY discount brokerage account.
Once you have really asked yourself some tough questions, considered the myriad of investment possibilities, done a little reading, and perhaps talked to a few financial professionals or joined an investment club, then you can confidently create a long-term investment plan that is worth sticking to. You can make the big-picture decisions about what asset classes your money should be in, and then fill in the details by choosing the specific stocks, bonds, and ETFs. The incredibly low fees and commissions charged to online investors means that if you can stick to your plan and control your emotions, you should be way ahead of traditional Canadian investors over the long term.
If you charge right into online investing without doing your homework or defining your goals/strategy, be prepared to be disappointed. Understanding the big picture and how risk affects your decision making can easily be the difference between a well-executed retirement plan, and a beat-up portfolio that ping-ponged from trend-to-bandwagon over the years.
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The opinions and views expressed in this presentation are those of the presenter and not necessarily BMO InvestorLine Inc. This presentation is prepared as a general source of information and is not intended to provide legal, investment, accounting or tax advice, and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained. Any information contained in this presentation does not constitute and shall not be deemed to constitute advice, an offer to sell/ purchase or as an invitation or solicitation to do so for any entity. The content of this presentation is based on sources believed to be reliable, but its accuracy cannot be guaranteed. BMO InvestorLine Inc. and its affiliates, sponsors and employees do not accept responsibility for the content and makes no representation as to the accuracy, completeness or reliability of the content and hereby disclaims any liability with regards to the same.