Get into your comfort zone

Although managing your own retirement planning is a big decision, it’s not one you need to shy away from. You know that investing carries risks and that you need to find some balance between risk and reward. Creating a portfolio that works with your risk tolerance may be easier than you think. Risk-based funds can help you to achieve a well rounded portfolio that directly addresses your investment comfort level.

Risk-based funds

Risk-based funds eliminate the need for you to evaluate and choose individual investment options by providing portfolios based on your personal risk tolerance. The preselected underlying mutual funds enable you to achieve asset allocation while aligning your portfolio to your tolerance level. The portfolio is managed by professionals and you simply monitor the risk-based fund to be sure it is in line with your investment goals.

Risk tolerance

Your personal risk level is a key component to your retirement portfolio. Investing comes with a degree of uncertainty and you have to be comfortable with the potential losses your investment may experience.

Risk tolerance is not solely based on a feeling of comfort. Other factors such as age and time horizon (when the investment money is needed) play a very important role in determining your risk tolerance. For example, a young investor may be willing to experience more loss knowing they may have time to recover before retirement whereas an older investor may not be willing to experience a significant loss if they plan to retire shortly.

Generally speaking, risk tolerance can be categorized into groups from conservative, to moderate, to aggressive. Each category endures an increasing level of potential risk, and accordingly, an increasing level of potential reward.

The importance of asset allocation

As an investor, you are well aware of the importance of asset allocation. By dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash, you can attempt to hedge against significant losses. Historically, the returns of the three major asset classes have not moved up and down at the same time. This means that if one asset category’s investment return falls, you could be in a better position to counteract your losses in that asset category with better investment returns in another asset category.

Risk-based funds do not overlook this key component. Each portfolio contains underlying mutual funds from a wide range of asset classes in order to help shield investors from potential loss.

Of course, using asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.

Confused by similar offerings?

The most notable similar product is a target-date fund. Risk-based funds are similar in the sense that the portfolio is made up of pre-selected underlying mutual funds that are monitored by professionals. The difference lies in the selection method and ongoing maintenance. Target-date funds* are aligned with your anticipated retirement date. As the time horizon to your retirement date lessens, your portfolio is adjusted to become more conservative to hedge against loss. Risk-based funds are aligned with your risk tolerance and do not change over time. Therefore, it is important to continuously analyze your risk level to determine if your portfolio is still helping you pursue your retirement goals.