Your willingness to assume risk with your
investments is not necessarily a static concept. You may be less
willing to take risk with investments designated for an essential
financial goal, while you may be more willing to take risk for
nonessential goals. However, those varying risk levels may be
difficult to assess if all of your investments are commingled
in one account.
For instance, assume you have three goals
- to ensure you have enough funds to support yourself through
retirement, to send your children to an Ivy-league college, and
to purchase a vacation home. The most crucial goal is to ensure
you don't run out of money during retirement. Thus, you want a
high level of assurance that you'll reach that goal, devoting
a substantial portion of your resources to the pursuit of it.
Your investments for that goal are likely to be somewhat conservative,
especially as you approach retirement age.
The next important goal is sending your
children to Ivy-league colleges. You have more limited resources
to devote to that goal, plus your children can still attend a
less-expensive college or pay part of the costs themselves. For
that goal, you may be willing to assume more risk with your investments
to increase the likelihood of reaching that goal.
Your goal for a vacation home is clearly
last, so you may have few resources to devote to it. For that
goal, you may be willing to use very aggressive investments, since
that may be the only way you can achieve that goal.
The point is that your willingness to assume
risk is not static. It will vary depending on how important each
goal is to you and how much you can designate to that goal. Commingling
all of your investments for all goals in one account may make
it difficult to analyze your investments in this manner. Thus,
you might want to set up separate accounts for each goal, so you
can more closely match the investments to your willingness to
assume risk for that goal.
