“The makeup of your portfolio depends entirely on your unique ability and willingness and need to take risk.”—Larry Swedroe
Swedroe, a prolific author and the director of research for the BAM ALLIANCE, says the ability to take risk is largely defined by the investment horizon, the stability of an investor’s income and the need for liquidity. Swedroe says the willingness to take risk can be succinctly summed up through the “stomach acid” test. Can you stick to your plan even when the market goes down for an extended period? This includes rebalancing — selling what has done relatively well or held its value and buying what has done worse. The need to take risk is determined by the rate of return that is needed for you to reach your financial goals.