Typically when investors think about risk, they become very focused on the day-to-day fluctuations in the markets and their investments with a heavy emphasis on recent activity. Behavioural finance experts call this Recency Bias. It’s the same phenomenon that pushes sports fans to overemphasize their team’s latest performance, rather than their long-term track record. Or consider the poker player who doubles his bet on the faith of his last winning hand. Definitely not a sound approach.
Too little risk is risky
The downside of letting actual or perceived market risk impact long-term planning is very real. An overly conservative approach to investing can limit your growth potential, and with that, increase the risk of falling short of your retirement goals or running out of money, especially after factoring in inflation.
What is longevity risk?
Longevity risk is one of the main concerns facing retirees. It refers to the risk of outliving your savings. Longevity issues come up as people enter retirement, generally with a fixed amount of money to fund their retirement years, but no fixed idea of how long their money needs to last.
Diversifying your portfolio to include a balance of conservative and growth-oriented investments has the potential to boost the value of your portfolio over the long run and combat longevity risk.
Any move to increase the return potential of your portfolio comes with added risk, but that risk can be managed with proper planning and the right balance of investments for each stage of your life.
Speak to your financial advisor to ensure you have an appropriate mix of investments for all your goals.
This article originally appeared in the Advice Matters newsletter.
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