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- While risk is necessary for rewards in investing, too much risk isn’t good.
- Financial planners generally suggest getting more conservative with your investments as you get older. If you don’t know your strategy or aren’t changing it with time, you might be investing too aggressively.
- If your investing strategy relies on owning a large amount of just a few stocks, you may be invested too aggressively.
- Other signs include having little cash on hand in an emergency fund, and trading often.
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Investing only works if you’re willing to take some risk.
While it sounds counterintuitive, risk is necessary for rewards, says financial planner and Facet Wealth co-founder Brent Weiss. “You cannot get the rewards that we’re looking to achieve long-term without taking on risk,” he says.
But, taking on too much risk isn’t helpful, either — it might make you unnecessarily anxious or leave you strapped for cash. Weiss says there are five key signs that someone’s taking on too much risk.
You don’t have any cash on hand
If you don’t have an emergency fund, you should build one before investing. According to Weiss, before taking on risk in your financial life, “you really should have a very solid foundation,” he says.
“It’s never been easier to buy stocks,” says Weiss. But just because it’s easy doesn’t mean it’s always the right move. “I see a lot of people that don’t have the emergency fund, they don’t have the positive cashflow, they haven’t protected their assets with insurance. That’s the No. 1 sign that people are being too aggressive, because they’re investing money that shouldn’t be invested. It should be put in something safe and secure.”
You don’t have a solid asset allocation strategy
There’s more than just one type of investment — stocks, bonds, mutual funds, and many other types are all options in investing. But they’re not all the same when it comes to risk. For most people, it’s important to strike a balance between investments with different risks to make a balanced portfolio, and that balance will change over time.
“I can’t tell you how many people, even in their 50s and 60s, have [a portfolio that is] 100% stocks,” he says. “That’s not a bad thing if you’re in your 20s or 30s; that’s actually a very good thing. But as you get closer to retirement, you really have to understand your time horizon.”
For most people, adjusting your asset allocation to be more conservative as you get older makes sense. “Markets will rebound. But the problem is, if you’re 60 or 65 and you’re about to retire, the risk you really face is, ‘What if I retire and I need to pull money out of my account when the market drops 30%?'”
You’re putting all of your investments in a few stocks
With the rise of self-directed and easily accessible stock trading apps, Weiss says that he’s seen an uptick in people making rash investing decisions.
“I see a lot of younger investors buying the hot stocks. They’re buying the stock that has gone up 50%, 200%, 300%. They’re not diversified,” he says.
Similarly, he adds, “I see it for individuals approaching retirement who worked for a company for 30 years, and they have a whole bunch of stock. They’re tied to it emotionally, but they don’t understand the risks that come with owning one [stock].”
“It’s putting all your eggs in one basket,” he says. Instead, he says that the smarter move is to own a variety of stocks, even through investments like index funds or mutual funds, which are funds composed of a variety of stocks.
You’re trading every day
In Weiss’s experience, people who are using investing apps or trading every day are probably making more risky moves than they should be.
In investing, he says, “It isn’t just what you own, it’s also how you own it.” Anyone trying to buy and sell to time the market and make a profit quickly is probably making a riskier move than they should be.
The better approach is to leave investments alone over a long period of time. “I’ve seen it in my 15 years in my career, and I’ve seen it through a lot of studies and research: investors are rewarded for taking a long-term approach,” he says. “Low-cost, well-diversified, and disciplined approaches around a financial plan work really, really well over the long term.”
You’re always worrying about your portfolio
One of the most simple signs is also the most telltale sign that you’re invested too aggressively: Your portfolio is always on your mind.
“If you can’t sleep at night or you are worried about your portfolio, you might be invested too aggressively,” Weiss says.
“People tend to think of it as an all or nothing thing,” he says. But that’s simply not the case. “If you’re feeling a little uncertain, you don’t have to sell all of your stocks for all cash or all bonds. You can just reduce the aggressive nature of your portfolio.”
If you’re worried, it’s worth changing your strategy and dialing down your risk some. “You should still be invested in stocks to some extent, but you can make slight adjustments,” Weiss says.