Reasonable Risk

Risk is synonymous with financial loss. There are small losses (market is down 5%) and there are big losses (market is down 45%). So what is the definition of reasonable risk?

Reasonable risk is the amount of risk you have to take to achieve your financial goals. There is a big difference in risk exposure for investors who need 5%, 10%, and 15% rates of returns (illustration purposes only) to achieve their financial goals. At one end of the spectrum may be a senior investor who is preserving retirement assets. At the other end of the spectrum is a Gen-Y investor who is just getting started accumulating assets for retirement.  

The 5% Investor

You are lucky if you only need a 5% return to achieve your financial goals. You are a low risk investor who might use the following asset allocation:

• 20% in conservative equities
• 60% in short-term government bonds
• 20% in CDs and t-bills

The 10% Investor

You are a moderate to high risk investor who uses the following asset allocation:

• 25% in intermediate and long-term bonds
• 25% in higher risk equities (small cap, emerging markets)
• 50% in moderate risk equities (growth, value, mid-cap, large-cap)

The 15% Investor

You are a very high risk investor who uses the following asset allocation:

• 50% in higher risk equities
• 50% in moderate risk equities

Paladin says.....

One of your biggest risks is not achieving your financlal goals. For example, you cannot retire when you want to or live the way you want to. Or, you do not have financial security late in life when you need it the most. It is reasonable to assume you have to take enough risk to achieve your financial goals.