Staying within your comfort zone

Understanding and remaining within your risk tolerance is one of the most important factors in investing. If someone invests outside their comfort zone, they might experience anxiety or regret—or even financial loss.

However, a market run or swing may sometimes tempt an investor to change their habits.

Raising risk

Consider someone saving for retirement who takes a balanced approach to investing. They see the stock market in a bull run and wonder whether to allocate more of their contributions to equities to capitalize on the opportunity. But what if the market suffers a correction? Then this moderate-risk investor, now with a more aggressive portfolio, might panic and question their decision.

A bull run can also tempt an investor when a shortening time horizon calls for a low-risk approach. For example, a parent has significant equity investments in a Registered Education Savings Plan (RESP), and their child has started secondary school. It’s time to focus on conservative investments, but the parent doesn’t want to miss out on the booming market. However, overinvesting in equities carries risk. If the market plummets at the worst possible time, the RESP could lose value when it’s time to withdraw funds for education costs.

When too safe is a risk

Any investor’s comfort zone can be tested when stock markets experience a sharp or extended downturn, and their portfolio value drops. Some long-term investors may be tempted to sell equity investments in case markets decline further or to direct future contributions toward lower-risk investments. But playing it too safe can be a risk in itself, as you may miss out on a market recovery and fall short of your investment objective.

Let us know if you experience undue anxiety during a market downturn so we can help you stay within your comfort zone.