Legal Disclosure: Tony Robbins is the Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.
You already know that asset allocation is the most important investment decision of your life, but how do you choose what percentage of your money should be invested in safe bets (what we refer to as your security bucket) and what percentage should be allocated to risker bets with greater potential returns (your risk/growth bucket)?
Before you make this choice, you must consider three factors:
1. Your stage in life
2. Your risk tolerance
3. Your available liquidity
Your risk tolerance is a key component in how you will play the game. And when it comes to risk, everyone has radically different ideas about what’s tolerable. If you’ve ever been to one of our events, you have heard about the six human needs. These needs are universal, and they drive all human behavior. If your #1 need is certainty, then your risk tolerance is going to be considerably lower than an individual who has variety as their top need. Your personality is going to dramatically impact the risk level you’re willing to bear.
Image©Izf/shutterstock
The trouble is that for many people, their perception of their risk tolerance and the reality are vastly different. They may think of themselves as a risk-taker, but when the cards are down they realize that their fear of losing outweighs the potential upside of winning. People don’t know their true tolerance for risk until they’ve had a real-life experience taking a significant loss.
So how can you determine what your risk tolerance is? Rutgers offers a great little quiz to help you determine your true risk tolerance.
But remember, what matters most is not what other people do. What matters most is what will meet both your financial and emotional needs. If you have an investment that producing great returns but is keeping you up at night, then you need to re-evaluate if that strategy is truly serving you.
What is even more important than building wealth is doing it in a way that will give you peace of mind. So what will it be? Write down your numbers and make them real! Are these percentages a comfortable fit? Walk around in them. Live in them. Own them! Because those percentages are the key to your peace of mind as well as your financial future.
Header image © Mauricio Graiki/shutterstock
