Nest Egg: Think Hard Before You Raise Your Risk

By Deborah Jeanne Sergeant

 

If you feel like your retirement fund could use a boost, carefully consider whether taking on greater risk is a good idea.

When clients ask about raising risk, Ken Burke, president and CEO of High Falls Advisors in Rochester asks the reason for raising risk.

“Maybe they want to grow their capital more,” he said. “Or maybe they think they need to make up for lost time. The first thing we’d help them determine is if they need to do that. everything needs to be tied to an objective or goal. Why take on unnecessary risk? If they need to make up for lost time, they shouldn’t take on more risk.”

The reason of course is that if the riskier investment sours, you’re that much further behind in retirement savings.

Deciding whether or not to take on more risk involves evaluating the capacity for suffering loss and the ability to recover.

A disappointing investment and subsequent loss could mean delaying retirement and possibly curtailing post-retirement plans such as traveling, purchasing a new home and helping out your adult children or grandchildren.

It could mean taking on a second job for a few years and lowering your quality of life.

“Your capacity for risk is lower if you don’t have a lot of financial assets and you’re not working,” Burke said.

These factors vary from client to client.

When clients ask about risk, Jeff Feldman, Ph.D. and certified financial planner at Rochester Financial Services in Pittsford, advises that taking on more risk doesn’t necessarily mean higher returns.

“Very often, risky investments can lose substantial amount of value,” he said. “They want to take risks to get greater gains, but risky investments can lose 40 to 50% very quickly. All investors need to have a perspective of what their overall risk tolerance is.”

Younger people can absorb more losses as they have more time to recoup them by cutting expenses, working more and taking full advantage of any company-matched investment plans.

Instead of riskier investments, Feldman said that stocks have done well historically over the long run.

Further, he does not view riskier investment strategies as a “quick fix” to a scanty nest egg.

“There’s no free lunch,” Feldman said. “More risk won’t ‘turbo charge’ your returns. The bottom line is to know your risk tolerance and your appropriate allocation risk. If you have been too conservative, taking on more appropriate asset risk but a too aggressive position might not translate to higher returns.”

Everyone investing to grow their retirement fund should meet with a financial adviser who can offer a plan tailored to their specific goals, timeline, risk tolerance and overall financial situation.

 

Lower Risk Investment

According to Forbes.com, the least risky investment types include:

1. U.S. Treasury Bills, Notes and Bonds

2. Series I Savings Bonds

3. Treasury Inflation-Protected Securities (TIPS)

4. Fixed Annuities

5. High-Yield Savings Accounts

6. Certificates of Deposit (CDs)

7. Money Market Mutual Funds