Your investments will probably be a major component of your retirement income. So it is important to avoid two serious mistakes as you prepare your investments for retirement. The first mistake is taking more risk than you are comfortable with. If your investments are too risky, you might bail out if there’s a big drop—this is called “selling low.” The other mistake is having too little risk in your investment mix so your investments won’t have enough horsepower to last for your whole lifetime.
Here is a tool to address both of these problems.
There is a cutting-edge computer application – an app – that evaluates your individual preferences in terms of how much risk you want to have in your investment portfolio. This app, which is called Riskalyze, lets you decide on the worst decline of investment values that you are prepared to accept over a six-month period without panicking. Riskier investments, in general, have the potential for higher long-term returns. But if the swings are too large for you, you might not be able to live with a mix that is too risky.
For example, you might be able to tolerate a maximum 12% decline if you have a similar chance of receiving an 18% positive return, but no more of a decline than that. Associated with that amount of risk is a number called your personal Risk Score.
This app also contains risk scores for almost all investments, including mutual funds, individual stocks and bonds, and annuities. The app can compute the Risk Score for any mix of investments that you might own. It takes the quality of diversification into account when computing the investment Risk Score.
The next step is to compare your personal Risk Score with your own investment Risk Score. Do they match or not? If not, optimally you would adjust your mix of investments until the two scores do match.
It should come as no surprise that an app which contains so much current investment information and is so powerful is not free. It is also not easy for an inexperienced investor to use. Financial planners may have the Riskalyze app in their toolbox to help you. As you prepare your investments for retirement, it would be prudent to ask your financial advisor if they can use their own copy of Riskalyze to help you in this way.
Another useful benefit of the Riskalyze app is that it calculates a projected long-term rate-of-return for your investment mix and also tells you the maximum amount of monthly income you can take out for your projected lifetime. Working with your financial professional, you can adjust your mix of investments and spending plans so that your money will last as long as you do.