Manage Your Investment Portfolio Like Goldilocks

Yep, I’m going with the Goldilocks tale to talk about your investment portfolio. Not too hot and not too cold. Goldilocks wants her porridge just right.

So you have your portfolio and you’re trying to grow it but not lose it. Too hot is taking too much risk, and too cold is taking too little risk. You have to take the right amount of risk to generate enough of a rate of return to make things just right.

Taking the “right” amount of risk with your investment portfolio can be hard to do. You can’t just hit some magical risk button and be done. I wish it was as simple as hitting a “that was easy” button ☺

It’s all about the rate of return

So how do you take the right amount of risk? Here’s the key. It’s all about the rate of return you need to make in your investment portfolio to reach your goals.

You have to take the least amount of risk to make enough money in your portfolio so that you can reach your goals. The deal is, most people don’t know what rate of return they need to make so that they can achieve their goals. And most financial advisors don’t connect the dots between the rate of return, the risk, and the goals.

We take too much risk when we get caught up in the hype

Ever heard of a bubble? Its when the price of something goes so high and usually stays high for a period of time. The price is high because people are buying it, causing the price to go up. Everyone is buying high and either selling higher, or just holding on, and watching their investment go up.

But its only a matter of time until the chicken comes home to roost and the price goes back to a lower valuation. Its like when the Nasdaq was at 5000. Remember when Lucent was at 80, Cisco was at 80, or when Yahoo was at 200? They key is not to get caught up in investing big money in a bubble or a fad. It’s all about taking enough risk to generate a rate of return to meet your goal.

We take too little risk and just put the money in the bank

For some people, earning 1% in the bank is enough of a rate of return to reach their goals. So putting money in the bank is fine. For others, a 1% rate of return in the bank just isn’t going to cut it. Other investors get so caught up in not losing money that they don’t take enough risk with their investment portfolio. They don’t see that the real risk is not reaching their goals.

Here’s an example:

Goldilocks wants to:

* buy a vacation house
* generate $5k a month in retirement income
* take a month off from work every year before she retires and lives abroad

She is going to invest $1500 a month to fund these goals. In order to do that, she needs to make 5% on her money. 5% is the rate of return that she shoots for, year in and year out. It’s the magic number, and how she and her financial advisor can determine how much risk to take to fund the goals. Then they build an investment portfolio that aims to make 5% every year. It’s that simple. Really.

Here’s the bottom line, tie your risk to a rate of return to reach your goals. Remember, not too hot and not too cold. Just right. You in?

Author's Bio: 

Justin Krane, a CERTIFIED FINANCIAL PLANNER TM professional, is the founder of Krane Financial Solutions. Known for his savvy, holistic approach to financial planning, he advises his clients on how to unite their money with their lives and businesses.

Using a unique system developed from his studies of financial psychology, Justin partners with entrepreneurs to identify, clarify and meet goals for increasing their business revenue. He works with entrepreneurs to create a bigger vision for their business with education and financial modeling.