Understanding My Risk Tolerance
Although it seems the banking concerns of last month have all but faded away we can apply an important lesson of understanding the risk we have in our investment portfolio. Today we cover the benefits of knowing your personal risk tolerance in your investment portfolio and how and why that may change over time. If you want to know what your risk number is, take the brief risk assessment to find out.
Your risk tolerance is the level of financial risk you’re comfortable taking with your investments. This can include the amount of uncertainty or volatility you’re willing to accept in exchange for a potentially higher return. Your risk tolerance can also influence your attitudes towards mitigating risk through loss of medical insurance or life insurance.
Knowing your individual risk tolerance is importance because it helps you make informed decisions about your investment strategy. As you invest within your risk tolerance, you’ll also gain perspective on what to expect from your specific investment strategies during changing market conditions. Perspective is invaluable as it can help mitigate one of the biggest risks to successful long-term investing: HUMAN EMOTIONS.
When you invest at a risk level below what you’re comfortable with, you may experience fear of missing out (FOMO) as you observe other asset classes rising in value. This could lead to a knee-jerk reaction and overcorrection in your portfolio’s risk profile. On the other hand, when you invest in more risk than you’re comfortable with, you may experience anxiety and consistently second-guess your investment strategy as you observe its value gyrate up and down.
While it’s important to know your risk tolerance, it’s equally important to acknowledge this can change over time. You may have a difference risk tolerance for different financial goals. Your tolerance may change based on your financial circumstances or investment experience. The amount of time you have until you accomplish a goal, the amount of time you need income to support the goal and the size of the goal can work together to influence how much risk you’re willing to accept.
Is there a “perfect” risk tolerance? The appetite that investors have for risks varies by a lot! That’s okay. There are some trade-offs to be aware of as you learn the characteristics of the investments that fit your risk profile. If you’re an investor with a high capacity for risk, be prepared for increased volatility and uncertainty. A portfolio designed to capture potentially higher returns can sometimes have results that differ greatly from its stated purpose. These variances can be exist for an extended period of time. These fluctuations can be caused by news, elections, monetary policy, fiscal policy, natural disasters you name it. Due to the volatile nature of these investment strategies as you approach your goal, you’ll want to consider de-risking your portfolio to lock in your gains and spend the money you’ve accumulated.
If you’re an investor with a lower capacity for risk be prepared for a less volatile experience. This may also mean you’re choosing to accept a potentially lower growth rate from the investment strategy. This may require you to be prepared to invest more at the lower growth rate, invest longer at the lower growth rate or adjust the amount of your goal. These strategies may make you feel great during market down-turns when you notice your unrealized losses are less than others. These strategies may also incite a bit of FOMO during bull markets when you notice you’ve not gained as much as others.
We believe the risk tolerance that you can comfortably stick with during the good, the bad and ugly while allowing you to successful meet your investing goals may be the right risk tolerance for you.
How to find your risk tolerance?
Quantitative Analysis: We use a quantitative and interactive assessment designed to get clear results you can use. When you receive your Risk Number, you can take the next step and use the analysis to compare your current portfolios to your Risk Number and see if you’re invested above or below your comfort level.
Self-Assessment: You can also reflect on your past investment experiences and how you felt about the risks you took. Consider how you reacted to market fluctuations or changes in your investment values. This can help you better understand your comfort level for taking on investment risks.
However you decide to determine your risk the key take away is know your risk tolerance and invest accordingly.