In: Finance
How does your risk tolerance and recommended portfolio allocation change between intermediate and long term goals?
Equities go up and down a lot on an annual basis. In extreme cases like in 2008, the stock markets went down by more than 50%.If you had invested everthing in equity for meeting your intermediate goals then huge amount of loss would have been the outcome.
But had this investmet done for long term goals like retirement plans then we all can stomach temporary losses and not panic. surely the market recovered in coming years, but in 2008 while staring at a 50% loss, it would have been difficult to say when the crash is over..
The risk tolerance will be generally lower for intermediate goals if we invest in equity but if we are not willing to assume risk then better to allocate in debt(FD) to have a acceptable risk tolerance level.For long term goals the risk tolernce level can be higher as a long time span can consume some risks . so the portfolio must be reviewed periodically on basis of market performance and access our risk tolerance level and accordingly allocate assets to portfolio.
whether we invest for a down payment of a house to be purchased in the next 2-3 years or for our retirement which is 30 years away. The two goals have very different time horizons and hence need to be managed efficiently. The asset allocation for a house down payment 3 years down the line will be primarily in debt because euities are too unpredictiable for this short time period. similarly for your retirement, the asset allocation should be heavily titled towars equity because the time horizon is long enough to reap the high returns from equity