Investing in your retirement accounts always carries some level of risk, regardless of whether you’re taking significant risks or trying to minimize them. In our previous blog post, we discussed how to assess your risk tolerance and establish a suitable foundation for your investment accounts. Today, our emphasis shifts towards considering your time horizon and financial goals.
Time Horizon and Goals
Your time horizon refers to the length of time you have until you need to access the funds in your accounts.
Typically, longer time horizons allow for greater risk tolerance, as there is more time to ride out market fluctuations. Consider a higher stock allocation across all your accounts if you have a longer time horizon, such as several decades until retirement.
On the other hand, if you have a shorter time horizon, such as a few years until retirement, you may want to be more conservative and invest less in stock and more in bonds and cash equivalents to protect your savings.
Another important note is that you may assess different time horizons for each account.
For instance, you may have significantly longer time horizons for your 401(k) and Roth IRA accounts, allowing you to take on more risk and be more aggressive.
In contrast, your individual brokerage account has a shorter time horizon, requiring you to take on less risk and be more conservative.
You may also assign individual financial goals to specific investment accounts that may affect their risk profile.
For example, you may have the short-term goal of using a specific investment account to fund a downpayment for a house within two years, leading to a more conservative risk profile.
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Every investment account and underlying investment you own must serve a purpose – why else would you invest? If you’ve never thought of investing in terms of working towards a goal, take some time to think about any upcoming financial goals or major milestones in your life and determine if any of the accounts you own are working towards those goals.
If, for some reason, after this exercise, you realize your accounts need some work,
rebalance your accounts to get them more in line with your goals. If this overwhelms you, reach out to our team, and we are happy to help you.
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