Risk Tolerance is your ability and willingness to stomach a decline in the value of your investments. While you are trying to determine your Risk Tolerance, ask yourself how comfortable you feel maintaining your positions when the stock market is experiencing a large decline.
How to Determine Risk Tolerance:
- What are your Investment Objectives?
- Are you looking to grow the value of your nest egg?
- Are you looking to preserve your nest egg and live off the income it generates?
- Each will convey a different tolerance for downside price risk.
- When do you need the Money?
- Your time horizon is a crucial piece of the equation. The sooner you need the money, the lower the tolerance should be.
- How would you react if your portfolio lost 20% this year?
- When assessing your risk tolerance, think worst case scenarios. If your investment lost 20% of it’s value, would you lose sleep at night and pull out all of your funds? Or would you leave it invested and consider putting even more in the market to capitalize on the discount?
Conservative Risk Tolerance:
Focus on preservation of capital, avoid downside risk, lower returns
Moderate Risk Tolerance:
Keep a foot in both camps – conservative and aggressive.
Example: 60/40 allocation between stocks and bonds Some may grow while maintaining an eye on stable income (bonds) at the same time.
Aggressive Risk Tolerance:
Majorities of portfolios allocated toward stocks or real estate, prospect of higher returns over time, but also greater chance of losing value in the interim. Be willing to accept the chance you will lose some or all of the principal.
Take some time to reassess your Risk Tolerance and make sure your portfolios match that assessment. Don’t hesitate to contact us to help your review and discuss your Risk Tolerance if needed.
This is meant for educational purposes only. Information presented should not be considered investment advice or a recommendation to take a particular course of action. All investing involves risk.