Reality has a strange way of not always meeting our expectations. For example, you might imagine that a family camping trip is the ideal vacation for you. But when the reality turns out to be bug bites, burned hot dogs and bored kids, you realize that you overestimated your enthusiasm for the great outdoors.
The same thing can happen when investing. Before your advisor recommends investment choices, they ask how much of a temporary drop in your portfolio’s value you would be comfortable with. You believe you’d be comfortable with a certain range—but when reality hits, your reaction could be different.
Three possible reactions
Here are three possible reactions and how your advisor might adjust your portfolio as a result.
It’s more difficult than you expected
If you become overly anxious when a market dip affects your portfolio value, you may need more conservative investments. Investing shouldn’t cause you stress. Your advisor can adjust your portfolio to better align with your newly discovered tolerance to risk.
You’re getting accustomed to market cycles
After experiencing one or more market cycles, you may feel more comfortable accepting risk and want to add more aggressive investments.
You react as expected
If you handle market downturns just as you thought and your reaction doesn’t change over time, you might not need any portfolio changes.
Your investment time horizon—the number of years until you expect to access your funds—can also influence your reaction to downturns. If you’re 20 or 30 years from retirement, you may be perfectly comfortable with a temporary downturn. On the other hand, if you’re closer to retirement, the same market decline might become a source of anxiety.
Talk to your advisor if your reaction to the market cycle’s ups and downs is not what you expected. They’ll discuss whether any portfolio adjustments might be advisable.