FINANCIAL PLANNING AND INVESTMENT STRATEGIES FOR CORYAND TISHA DUMONT: A COMPREHENSIVE GUIDE TO MANAGINGRISK, ASSET ALLOCATION, AND LONG-TERM GOALSCONTINUING CASE: CORY AND TISHA DUMONTPART 4:MANAGING YOUR INVESTMENTS1.How should Cory and Tisha approach their investment strategy in relation to their individualrisk tolerances, and how does the time horizon affect their risk-taking ability?To reach their long-term investment goals, Cory and Tisha must understand their individualtolerance for risk.Then, based on their risk tolerance, for individual or joint goals, theymust match that tolerance to the risk-return characteristics of securities in anadequatelydiversified portfolio.For example,because Cory is morerisk averse, learning more aboutthe risk-return trade-offs of investments, could increasehiscomfort with adding more riskierinvestments.Those that take on too much risk often sell at the slightest market downturn,thus selling at a loss, rather than recognizing that volatility, or fluctuations in security prices,are associated with risk. Butunderstanding that risk and return go hand-in-hand, and thatthere is risk in being too safe—returns that are not adequate to achievegoals aftersubtractingtheeffectsofinflationandtaxes—mayencouragehimtoaddriskierinvestments.Conversely Tisha’shighertolerance for risk maybe equally devastating tolong term returns, if the risk is not adequately balanced inawell-diversified portfolio..Finally, the longer the time horizon,the more riskCory and Tisha may safelytake, yet theymust realize that all investments have some risk!2.HowcanCoryandTishaavoidcommonbehavioralbiasesandmindgameswhendeveloping their investment strategy to ensure they stick to their long-term financial goals?Consistent withPrinciple 9:Mind Games and Your Money, Cory and Tisha will be bestserved by developing an investment plan matched to their goals, risk tolerance, timehorizon, investment knowledge and experience, and available funds for investing.Beingaware of the following mind games, may help them stick to the plan:•Overconfidence:avoid thinking that they know more than they do, and thinking theycan beat the market.•Disposition effect:avoid the natural aversion to acknowledging bad deals and cuttinglosses. Instead of selling losers, they could be tempted to sell a winner (and perhaps paytaxes) to feel pride and confidence, rather than selling the loserand admitting themistake.•House money effect:avoid thinking of earnings asdifferentfrom the initial investmentdollars, so that more risk is taken with the earnings. At some point it may be wise to sellPreview Mode
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