Boost Your Investing Performance in Three Simple Steps

Editor's note: Today, we're continuing our holiday series by revisiting some of our favorite timeless essays from Stansberry Research and our affiliates. In this issue, first shared in September 2018, Dr. David "Doc" Eifrig explains how understanding your risk tolerance can directly impact your portfolio's performance – and shares three questions you should ask yourself every year...

I dread this question...

"What should I buy today?"

There's no good answer...

Without knowing your goals, risk tolerance, and a dozen other factors, my response is almost irrelevant.

Unfortunately, many investors don't fully understand their risk tolerance. That has consequences.

If you're new to investing, you may lack the confidence to take investment risks. Maybe it has even kept you from investing at all, and you've missed out on the incredible gains from the current bull market.

Here's the thing... Adding an appropriate amount of risk to your investments greatly improves your portfolio performance.

So today, I want you to assess your own risk tolerance. And I've included a three-step guide below to get you started...

Understanding Your Risk Tolerance

First, let's talk a little more about how to think about risk...

In the market, risk is measured by volatility. The more volatile an investment, the more its price swings up and down.

That's why stocks are much riskier than bonds or money-market accounts. Their prices are more likely to fluctuate. You stand to make a lot more money as a stock moves up, but you could also lose more when it falls.

If you're taking on too much risk, your portfolio could take a big hit... especially if we enter a bear market.

Meanwhile, if you're entirely risk-averse, you could miss out on the investments most likely to see major upswings.

Let's review the common investment vehicles and where they fall on the risk spectrum:

As you can see, the least risky investments are cash and cash equivalents, like certificates of deposit. These are usually extremely stable investments, but they offer low yields.

Generally speaking, stocks are the riskiest investments. They are the most volatile, but also produce the biggest gains.

So when considering how much to invest in each asset class, start with a few simple questions. Write down your answers and keep them for reference whenever you make future investing decisions.

In fact, it's a good idea to review your plan and risk level each year. Consider the following:

1. How close are you to retirement?

A popular theory is the "100 minus age" rule. Take your age, subtract it from 100, and that's the percentage you should invest in stocks. That means a 35-year-old woman should have about 65% of her portfolio in stocks.

The idea is that the younger you are, the more time you have to recover from losses. So you want to take on more risk earlier.

However, this is still a general guideline. Everyone needs to determine how comfortable they are with risk. That's why we need to answer two more questions...

2. What is your primary investing goal?

Are you looking to preserve your wealth, generate income, or grow your investments? These choices represent different levels of risk as well.

For example, if you want to generate income, buying dividend-paying stocks will yield more than a typical savings bond. So you'll want to account for that increased risk.

One solution: Consider multiple accounts.

We know a few folks have both a conservative "retirement only" account and a trading account where they take on more risk. This is a great way to potentially earn big gains without doing damage to your retirement nest egg.

3. How much are you willing to lose in a one-year period?

Before investing in anything, figure out how much you are comfortable losing and write it down. If you don't want to risk much, opt for less risky investments.

Also, be disciplined about selling an investment if it falls by that amount... That's how you keep losses from growing larger than you can handle.

These three guidelines are just the beginning of understanding your risk tolerance... But they're a good place to start. So ask yourself these questions today. It's one of the surest ways to improve your investing performance.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Over the past year and a half, Doc and his team have recorded 78 consecutive winning trades... with zero losers. Now, his rare and surprising market outlook for 2026 could change how you make money next year. And for this holiday season, he's making the most generous offer in 15 years for his No. 1 all-time-favorite strategy.