You should also consider your need to take risk. Have you already saved enough? If so, why continue taking risk? Far too many investors fail to understand that the strategy to get rich (take risks) is entirely different from the strategy to stay rich (minimize risks, diversify the risks you take, and don’t spend too much). – Larry Swedroe
I read a story once about a wealthy older lady who had just hired a young, hotshot money manager. In their first meeting she looked the younger man in the eye, pointed her finger at him, and said, “Now remember, you don’t need to make me rich. I am already rich.”
In my last post I introduced Larry Swedroe’s risk framework, which consists of three vital questions everyone needs to answer before determining how to allocate their investments between risky investments like stocks and safer investments like cash and bonds. The first vital question is: How much risk do I need to take?
The lady in our story was informing the hotshot money manager that she didn’t need to take risk, and that his most important job was protecting what she already had.
Most of us are not as fortunate as the lady in the story and need to take risk to have a chance of reaching our goals. In fact, most of us are woefully short in saving for retirement and will need to not only save more, but also take risk, to have any chance of maintaining our standard of living when we are no longer working.
How close are you to reaching your financial goals? Can you achieve them just by increasing your savings or do you need to take risk? How much risk will give you the best chance to reach your goals? These are the types of questions you must answer when considering how much risk you need to take.
If you save faithfully and take the appropriate amount of risk one day you can also be in a position where you don’t need to take risk if you don’t want to. This should be the goal for all of us. Until then periodically determining how much risk you need to take is an important part of the asset allocation decision.