Quora Answer: How Much Risk Should I Make in My Investment as a 55-Years Old & a Little Short of My Goal?

The following is my answer to a Quora question: “How much risk should my investment strategy have, when I am 55-years-old, and believe I am a little bit short of my retirement goal?” 

At that age, I am assuming that you are looking to retire in a decade or so.  As such, your strategy is dependent on how short you are.  If you are slightly off, then you should maintain your course, with slight tweaks such as a slightly heavier weightage towards equities.  We are talking about adjusting the portfolio by a few percentage points. 

If the shortfall is significant, it requires quite a bit of work.  This means relooking your investment strategy, the macroeconomic trends, and your portfolio weightage.  Was it too conservative, and heavy on debt instruments?  Was it too aggressive and exposed to volatile markets such as Emerging Market Funds?  If it is the former, then it is a simple matter of slowly adjusting the portfolio weightage towards equity.  If it is the latter, panicking would turn a paper loss into a realised loss, which is the last thing you want.  There is nothing wrong with taking on more risk provided it is calculated risk, and not speculation.  The question is not how much risk, but the type of risk. 

For example, most technology funds are high risk because a missed profit expectation can cause the stock to tumble significantly, but the overall trend is still towards positive earnings.  An example would be Apple.  On the other hand, derivatives tend to be risky bets unless you have not only the risk appetite, but the financial strength to absorb temporary losses.  Unless you really know what you are doing, there is a greater chance to make a loss than a gain. 

Other types of risk to consider include institutional risk, currency exposure and political risk.  Even in these categories, not all risk is the same.  I would recommend against following trends, since they are short term, whereas your investment horizon is longer.  I would recommend against most emerging markets, because they are fads to me.  And when it comes to currency risk, it is important to take note of the current account of the country because that will tell you a lot about where the country is heading in the next three to five years. 

However, in either scenario above, a decade is enough time to fix the shortfall, or at least bring it closer to target.  There is no need to panic.