If the latest bout of market volatility had you panicking about your portfolio, you may have been invested out of line with your risk tolerance, experts say.
Understanding risk capacity and risk toleranceFirst, a dip in your portfolio would materially affect the rest of your financial picture. That's called your risk capacity. If you're years away from a long-term goal, such as retirement, short-term dips in your portfolio aren't necessarily a very big deal because your investments have decades to recover.
Investing pros call your ability to stick to your financial plan in the face of investment losses your risk tolerance. It's fine to feel panicky when big red numbers start to fill your portfolio page, says Brad Klontz, a certified financial planner and financial psychology professor at Creighton University. But if you let that panic drive you to rash financial decisions, you could potentially do real harm to your finances, Klontz says.
Generally, younger people saving for retirement can invest that portion of their portfolio predominately in a broadly diversified array of stocks, Benz says. They offer higher long-term returns than other types of assets, but also tend to come with more risk. "If I'm not comfortable in this kind of up-and-down market, I need to remember that and put in protections so I don't feel this way next time it happens," says Kelly LaVigne, vice president of consumer insights at Allianz Life."Because it will happen again. And you'll feel lousy again."
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