Our Thoughts

5 Steps to Determining Your Risk Tolerance

There’s risk to any financial investment. There are no sure winners and no sure losers. How comfortable you are with that statement may give you an idea of where your risk tolerance is. Think of risk tolerance as how much uncertainty you can live with from day to day.

Does market volatility fill you with dread? Will you be able to sleep at night when there’s a market correction? Do you have a financial advisor who you trust to help create a plan for you? Can you call that same advisor when you get the market jitters? These are the kinds of questions you should be asking yourself. The answers will help determine your risk tolerance.

Personality

Don’t ignore your personality when determining your risk tolerance. Other contributing factors can be measured, like age or income. However, you may simply dislike making risky investments. That’s okay. You should be comfortable with how your money is being put to work for you. The best allocation is the one you can stick with.

Financial Goals

What you’re working towards may impact how much risk you’re willing to take on. If your goal is to have a nice pile of money to retire on at 70, your plan is likely to look different than someone pursuing the FIRE (Financial Independence, Retire Early) Path.

Retirement-focused goals aren’t the only goals that can impact your strategy. You may be saving for a house, creating an education fund for your children, or considering buying a business. Speaking with a fiduciary financial advisor can help you determine the right plan and balance for all your financial goals.

Timeline

A major factor in determining your risk tolerance is your time horizon. If you’re young, you have more time to ride out the ups and downs of the markets, so you may be comfortable with a higher risk tolerance. If you’re nearing retirement age, or you have a shorter-term goal, you may consider a more conservative approach. But note, nearing retirement still means you may have a 30 or 40-year time horizon!

Wealth and Income

If you have $5 Million, you may be more willing than someone who has $500,000 to put some of your money into an investment that requires a higher risk tolerance.  You may also consider additional factors, such as the amount of debt you’re carrying, or whether your personal ecosystem (job, family, assets, etc.) is strong and stable.

A Financial Planner

A financial planner can help you determine your risk tolerance and create a plan within your comfort zone to help you reach your goals. Having a trusted partner in your corner can also help manage some of the anxiety that comes with economic volatility. A good financial plan will account for the ups and downs of the economy, and your advisor will be there to help you throughout your journey.

Even after you’ve asked yourself the tough questions, you may still want to talk about risk tolerance and assessment with an experienced financial advisor. You may find that you are not as risk-averse or risk-tolerant as you thought. And you may find your comfort level changes as your life stages and seasons change too! You can learn about yourself and make better decisions regarding your future.

 

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.