Assessing Risk

Simple Errors Can Seriously Reduce Your Portfolio Value Over Time

The common mistakes many investors make can really add up, and may have a bigger negative impact on your portfolio than you realize. If you familiarize yourself with the most frequent investing mistakes you can begin avoiding them - and improving your overall success.

Here is just a one example of a common investing mistake. To learn about all of them, click here.

Could You Be Improperly Judging Risk?

Many investors improperly judge risk. Generally, the longer the time horizon of your investments, the more risk you are able to take on. However, a typical mistake many investors make is to take on too little risk. That's right – they focus on short term volatility rather than, more properly, the long-term probabilities of achieving their objectives. The result tends to be portfolios that underperform their goals.

For example, some investors consistently load up their portfolios with low-coupon Treasury bonds because they fear stocks will drop in the short-term—even if their time horizon is greater than 20 or 30 years. This strategy barely generates a return over the rate of inflation—significantly reducing any chance of growing a portfolio or even maintaining a satisfactory lifestyle, especially if withdrawals are also anticipated.

Conversely, those with short time horizons for their assets are often overly exposed to risk, which creates a danger of asset loss during a short-term period of volatility. This can put their entire financial future in jeopardy.

The chart below shows potential equity allocations based on different time horizons. While every investor's situation is different, in general the percent of your portfolio allocated to equities should increase as your time horizon increases.

Optimal Investment Mix Chart

Understanding your exposure to risk can help you better protect your portfolio and make better allocation decisions. To learn more about the other common investing mistakes and how you can avoid them, click here.

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