WHAT IS MY RISK TOLERANCE?
Risk tolerance refers to the amount of loss an investor is prepared to take on when making an investment decision. Everyone has a different level of risk tolerance based on their personal financial situation and stage of life. This tolerance plays a critical role in determining the allocation of your portfolio.
WHAT TO CONSIDER WHEN DETERMING MY RISK TOLERANCE?
Your goals dictate the amount of funds you will require in the future. By understanding this number compared to your current investment, an investment strategy with a necessary level of risk can be put in place to deliver the appropriate returns.
Markets are unpredictable, so individuals with short-term financial goals may not be able to ride out the ups and downs. Less risky investment options may be better for their goals. For example, someone planning to buy a house or nearing retirement would likely require a more risk-averse portfolio compared to a 30-year-old saving to retire at 65 years old.
YOUR CAPACITY FOR LOSS:
An individual going into retirement with a $5 million portfolio likely has more capacity for risk than someone with $500,000. This is assuming both individuals have moderate living expenses.
YOUR PERSONAL COMFORT LEVEL:
Everyone is different, and some people are naturally more comfortable taking risks than others. Those who are most stressed by market volatility often require more conservative portfolios.
Godsey & Gibb assesses the risk tolerance of all clients when they begin to work with our firm. Following the assessment, we use our conversations with you (and your financial plan, if you have one) to update your tolerance level and investment strategy. Life-changing events can impact one or more of the factors that affect your risk tolerance, which is why it is critical to keep an open line of communication with your advisor. These events may include the retirement of one or both spouses, an addition to the family, medical events, or a death in the family.
Questions? Please contact us or reach out to your advisor.
Author: Kyle Fischer, CPA, CFP® | Wealth Management Advisor
Written: June 15, 2021