Q: I’m a retired fed that’s scared of losing my retirement money. How do I know if I am invested correctly?
When I retired, I moved my TSP into an IRA account with a big name advisor.
I am married and will turn 66 later this year. I don’t need any of the TSP money right now, but will someday. I’m nervous about how the advisor has it invested. Since I am retired I feel I am very conservative about how my money should be invested.
When I look at my monthly statements, I see the balance making drastic movements from one month to the next which concerns me. My wife says to leave it up to the advisor, but I need reassuring that the money will be there when we need it.
A: An initial red flag, for me, is that you asked the question to begin with. You said that you were worried and concerned about the movements of your account values. This tells me that you are probably not invested in line with your comfort level. If you were then the movements you see shouldn’t worry you.
It sounds like you are really asking if your investments match your “risk tolerance.” Risk tolerance = your ability to tolerate investment losses vs your desire for investment gains.
Each of us has a limit as to the amount of losses we can comfortably bare. The industry has struggled for decades to find reliable ways to measure the amount of risk investments offer and individual investor risk tolerances. Then, they look for ways to match up the investor with a mix of investments that are in alignment with their comfort zone.
Confused? You’re not alone!
An assortment of (similar) risk measuring tools have been used to overcome this dilemma for (I would guess) the past 30 or 40 years. They have all assigned investors a term to describe their personal “risk tolerance.” You alluded to one of these terms in your question. You said, “…I am very conservative…” Conservative is one of those terms, along with aggressive, moderate and combinations of the three terms.
That’s were many advisors have problems identifying an appropriate investment mix for each client’s specific needs. People are extremely diverse in their ability to deal with financial loss vs. their financial growth needs.
Yet, with these measuring tools, there are only 5 different risk tolerance categories; conservative, moderate-conservative, moderate, moderate-aggressive or aggressive. That’s it! That’s why, it’s not uncommon for an advisor to use pre-established portfolios for their clients. Clients could easily be Pidgeon-holed into one of these portfolios. Conservative clients are placed into one specific (conservative) portfolio, moderate clients are in another portfolio and so on.
But, do two conservative people have the exact same financial needs? Probably not! Therein lies the problem. How do we make even deeper and accurate distinctions between two people that fall into the same category?
Someone has come up with a unique tool that I recently came across. It’s a new technique where you can determine if you have the “right” investment mix.
It is a simple 5 minute questionnaire that calculates individual risk tolerance. The best part, it does this without using those old ambiguous terms. Instead it provides number scores for both you and your investment portfolio. Both scores will range from 1 to 99. Once you learn your numbers, you compare them to make sure they match. That’s it! All you have to do is compare your individual score from 1 to 99 to your investment portfolio score also from 1 to 99.
If you would like to try it, Tim, here is a “Risk Analyzing Tool” link.
NOTE: If you are going to answer the questions, you need to be as honest and accurate as possible. Inaccurate answers WILL give you inaccurate results.
After receiving your individual score, contact my office and we will help you obtain the score of your asset allocation in your investment account(s) as well. Then you will be able to do your comparison.
Once completed, you will know if you are invested correctly or not!
Disclosure: Investing involves risks, including the loss of principal. Asset allocation does not ensure a profit or protect against loss.
Securities offered through LPL Financial, member FINRA/SIPC.