Develop ‘risk tolerance,’ invest early to achieve financial wellness
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WAILEA, Hawaii —Achieving financial wellness requires a sound understanding of asset allocation and increased “risk tolerance” when investing, according to a presenter at Hawaiian Eye/Retina 2024.
The three key pillars of asset allocation for investors to understand are stocks, bonds and cash, Andrew Taylor, CFP, said.
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“The financial media is going to make you believe investing is all about picking the hottest stocks, but the reality is over 90% of the variability in your return is going to be determined by how you allocate your assets amongst these three core asset classes,” he said.
According to Taylor, the standard investment lifecycle will yield an almost 10% annualized return in equity, while long-term bonds will yield around 5.58% and cash around 2.5% to 3%. One of the biggest mistakes investors can make is failing to understand their “risk tolerance,” or the willingness to keep funds invested through peaks and troughs in the market.
“At some point in your investment lifecycle, you're going to experience a 30% loss. That makes things more and more difficult to accept, particularly as your wealth accumulates,” he said. “You can't necessarily predict short term volatility.”
However, investors should not attempt to time the market, as they will risk missing out on the best market days.
“Naturally, when do the best returns occur? It’s after the worst days,” Taylor said.
In addition, Taylor explained that allocating funds as early as possible is essential for financial success.
“For those younger investors, if there's one item that you take away from the talk today, it should be: Start early, and save as much as you can in those early years,” Taylor said. “... Saving early and the power of compounding makes a tremendous difference in achieving a successful retirement outcome.”
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Taylor A. Achieving financial wellness. Presented at: Hawaiian Eye 2024; Jan. 13-19, 2024; Wailea, Hawaii.
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