Personal Finance

Given the current state of the markets, you’re probably wondering if you should be making some changes to your investment portfolio.

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Maybe you’ve got the urge to sell as stocks fall. Or maybe you want to do the opposite: Take advantage of big market drops by “buying the dip” in anticipation that stocks will rebound back to records. You’re the kind who doesn’t mind taking on a little more risk. Looking for a better reward.

You’re not alone. I talk to people every day who are either worried about the future or giddy with greed. Some suffer from FOMO—the fear of missing out. Many are making rapid investment decisions without considering their long-term financial goals.

Some are my clients. They’ll call and say, “Hey, I’m watching the news, and I see the market was up 22% last year, but my portfolio was up only 15%. What’s going on?”

Measure your risk tolerance carefully

Those can be difficult conversations, but it’s important to remind folks that we’ve done the work to determine their risk tolerance, and we’ve designed their portfolio with that in mind. Like many advisers, I use a tool called Riskalyze. You answer a series of questions about risk and reward, and whatever you score on a scale from 1 to 99 determines your discomfort with potential losses vs. your desire for potential gains.

I like it because that risk number sets realistic expectations with a significant probability. (It’s impossible to nail down a portfolio risk with 100% accuracy. There’s always a chance of a black swan event—something that deviates so far from the norm that it’s impossible to predict.)

So, let’s say your risk number comes out to a 65. We want to make sure you stay invested at that level. No matter what happens, we’re sticking with that plan.

Don’t let emotions ruin your retirement

And there’s a good reason for that: Without a plan, many investors out there underperform in a majority of major asset classes. When the market heats up, they want to be a part of it, and they take on more risk than they really want. Then, when the market crashes and they can’t handle it anymore, they take their money out, selling low. When it starts feeling safe again and the market is heading back up, they want back in, buying high.

They let their emotions run the show. Which is exactly the opposite of what you should be doing.

Riskalyze lets me analyze a portfolio to see if it really fits with what a client says is their comfort zone. Four out of five people we put through the program fail to line up. And that can bring some surprises, in good times and in bad times—but especially in bad times.

We also can use your risk number to look back at how you would have done in a good year, like 2013, or a bad year, like 2008. It’s a much better predictor than your saying to me that you’re a conservative or moderate or aggressive investor. Those terms are subjective and don’t really tell me much. Getting an accurate risk number helps me find and keep you in your zone.

The only times to change your retirement plans

And you shouldn’t move out of that zone based on the market’s ups and downs. Instead, you should make changes based on life events. For example:

• When your time horizon changes. Once you’re about 10 years from retiring, you’ll want to start adjusting your risk. You’ll probably take it down, especially if you’ve already met your goals and you know you could retire with your current nest egg. Or you may wish to take up your risk, if you find you have a shortfall and you’ll need more money to have the lifestyle you desire. At five years out, you may want to play it even safer, because you may not have time to make up for any big losses.
• If a parent dies and leaves you some money. With some extra breathing room, you won’t need to earn as much, and you may be able to take down your risk a bit.
• strong>If you pay off a large debt. You may find you don’t need as much income as you thought, so you can put more emphasis on protection instead of accumulation.
• If your spouse passes away. Couples often disagree on how conservative or aggressive they should be with their investing—and they tend to meet in the middle. If you’re the surviving spouse, you may wish to adjust your risk to your personal comfort zone instead of what you decided together.

This is the money you’ll need to live on for the rest of your life. Once you have a solid strategy in place, if you stick to it, you can have a much better chance of success.

If the desire to invest in this bull market is just too strong to ignore—and you can afford to take on additional risk—I recommend carving out a small piece of your portfolio that won’t affect your retirement and opening an online trading account. Go ahead and take a little more risk with that money. You’ll get the thrill, but you won’t be putting your future security on the line.

Just keep in mind that the closer you get to retirement, the more crucial it becomes to stay the course with your investments. Don’t try to keep up with the Joneses, your friends and co-workers, or the S&P (which has a risk number of 78, by the way).

Do what’s best for you.

Kim Franke-Folstad contributed to this article.

Securities offered through Madison Avenue Securities, LLC (MAS), Member of FINRA/SIPC. Investment advisory services offered through IMG Wealth Management, Inc., a Registered Investment Advisor. MAS and Investment Management Group are not affiliated entities. MAS and IMG Wealth Management, Inc. are not affiliated entities. Investing involves risk, including the potential loss of principal.

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Philip Detlefs is an Investment Adviser Representative with Investment Management Group. He has passed the Series 7, 63 and 66 securities exams and is a licensed insurance professional. He has a bachelor’s degree in finance and marketing at Florida State University. He is married and has three children, Olivia, Harry and Hutch.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.