Monitoring Financial Health: Equity Rate

by | | Investing

Equity Rate

What is Equity Rate?

Equity Rate is an important financial metric.  It’s the percentage of your investment portfolio that’s in stocks. “Equity” is another word for “stock.”

Equity (Stock) Investments / Total Investments = Equity Rate

Example: Assume you have $2 million of investments. If you have $1.2 million invested in stocks, your Equity Rate is 60.0%. $1.2 million / $2 million = 60.0%.

Why is Equity Rate Important?

Equity Rate shows how much risk you have in your portfolio. Knowing your Equity Rate helps you tell if your investments are too risky for your personal situation.

A key aspect of risk is volatility. Volatility is the frequency and magnitude of price movements, up or down. Bigger and more frequent price swings mean a more volatile (or risky) investment.

A portfolio with a high Equity Rate (say, 100% in stocks) will be more volatile than a portfolio with a low Equity Rate (say, 20% in stocks).

Equity Rate Ranges

Your Equity Rate can range from 0% to 100%. You should decide how much stock to own based on your ability, willingness, and need to take risk.

Ability to Take Risk

Your ability to take risk is driven by your time horizon.  If you won’t need the money for a long time, you can take more risk (own more stock). If you need the money sooner, you should take less risk (own less stock).

This chart shows guidelines for equity rate by time horizon. These are not exact formulas. Also consider your willingness and need to take risk.

Investment Time Horizon

Maximum Equity Rate

0-5 years

0%

6-10 years

30%

11-14 years

60%

15-19 years

80%

20+ years

100%

Willingness to Take Risk

Your willingness to take risk is driven by how you react when your investments go down. Be honest with yourself here. Some people stay focused on the long term, while others get nervous and consider selling.

Bottom line: you should only own an amount of stock that won’t cause you to “panic sell” when the market goes down.

This chart shows guidelines for equity rate by the maximum loss you can tolerate without selling. These are not exact formulas. Also consider your ability and need to take risk.

Maximum Tolerable Loss

Maximum Equity Rate

10%

10%

20%

30%

30%

50%

40%

60%

50%

80%

60%

100%

Need to Take Risk

Your need to take risk is driven by where you stand relative to your goals. Do your current investment balance and Savings Rate put you where you should be?

  • If you’re behind, you may need to take more risk to catch up. If you take more risk, you could make more money, but you could lose more too.
  • If you’re ahead, you may be able to take less risk, especially if you’re close to reaching your goals already.

Monitoring Equity Rate

As you get older and life events take place, your ability, willingness, and need to take risk will change. It’s important to monitor your Equity Rate and make adjustments as needed. Most importantly, never own more stock than you can handle if the market goes down.

Is your Equity Rate based on your ability, willingness, and need to take risk? Schedule a FREE Financial Pulse Assessment™. Part of our assessment is an investment analysis, which includes a review of your Equity Rate.

Get new articles sent directly to your inbox.

The 5 Biggest Financial Mistakes ER Doctors Make And Simple Ways To Solve Them

 

You’ll also get new articles sent directly to your inbox.

Success! Check your email inbox for next steps!