Is your investment allocation in sync with your risk tolerance?

At GuideStone^®, we believe that whether you’re just starting your career or nearing retirement, ensuring that your investment allocation is properly aligned with your risk tolerance will always be a critical aspect of your saving strategy.

An investment allocation is how you divide your money among different types of investments. Your proper allocation will be different than anyone else’s because it depends on these three personal factors:

1. Your time horizon: How old are you, and how long do you have until you retire?
2. Your risk tolerance: Do you have a high tolerance for risk, or are you more risk-averse?
3. Your financial goals and circumstances: What are your hopes for your retirement lifestyle, and how much income do you estimate will be required?

Think of your proper allocation as a recipe: you choose the right mix of ingredients (your investments) based on what you’re trying to make (your financial goals) and your taste preferences (your time horizon and risk tolerance).

So why is it necessary for you to regularly re-evaluate and adjust your allocation? One word: risk.

We tend to think of risk as something to be avoided, but not all risk is bad. Remember, the potential for gain always comes with a measure of risk. Typically, the greater the potential for gain, the greater the risk. When it comes to investing, stocks — which typically carry higher risk in the form of price volatility — have historically outperformed bonds, which promise interest and principal payments and usually carry a lower price volatility.

Intentional risk can potentially be a useful tool when utilized appropriately. Generally speaking:

1. Young investors may be able to afford to invest more aggressively due to a longer time horizon before retirement. You could consider a higher exposure to equities (and their volatility) in the early stages of your career.
2. Investors approaching retirement may need to invest more conservatively. Your risk tolerance will likely decrease as you approach retirement age, so you may need to consider allocating more assets to fixed income options to potentially help preserve your investments.

On the other hand, unintentional risk is the exposure to a potential financial loss that could occur without your full awareness or understanding. Unintentional risks are not aligned with your risk tolerance or time horizon and can go unnoticed until a loss occurs.

Examples of unintentional risks include:

1. Overconcentration in a single asset or asset class without realizing it
2. Holding too much cash in a long-term portfolio, missing out on growth
3. Not rebalancing, resulting in a portfolio that drifts away from your intended allocation

Unintentional risks left unchecked for too long can prevent you from reaching your financial goals. That’s why we encourage you to be proactive in your retirement journey and regularly take the time to ensure you are properly invested. A financial advisor can help you stay on track by providing regular one-on-one reviews, rebalancing and other adjustments to keep your portfolio aligned with your risk tolerance and investment strategy while guiding you through the market’s ups and downs.

Understanding whether you’re properly allocated isn’t just about numbers but about being intentional with your risk, aligned with your goals and aware of the hidden pitfalls that can derail your progress.

By regularly reviewing your investment strategy and making informed choices, you can stay on course to achieving your retirement goals. Not sure if you’re on track for retirement? We have several helpful resources and calculators available to help determine where you are and how to get where you want to go.

For more information, contact us at Info@GuideStone.org or 1-888-98-GUIDE (1-888-984-8433), Monday through Friday, from 7 a.m. to 6 p.m. CT. GuideStone members can evaluate their retirement portfolios today by logging on at MyGuideStone^®.