Understanding Your Risk Tolerance
Understanding Your Risk Tolerance
Before you begin searching for the best investments for your financial goals, it's smart to understand your risk tolerance.
Risk is Something We Tend to Avoid
Especially When it Comes to Investing
When it comes to financial planning, the concept of risk is actually something of which each of needs to be aware.
Your personal risk-tolerance is often determined by answering some simple questions and supplying basic personal data like age, years to go before retirement, health/marital status, income, etc. While the dynamics between risk and one’s personality are too great to adequately address here there are some points worth considering.
Whether you’re a middle-aged professional focused on accumulating wealth or a retiree or pre-retiree working to preserve what you and your spouse have earned or wondering how to best leave a legacy for your grandchildren, the concept of risk automatically evokes responsibilities and personal emotions as people often demonstrate different attitudes towards it.
As frequently discussed in our offices, the psychology behind risk and one’s reactions to it are complex and tricky to maneuver. Some who come into money either gradually through their own perseverance or suddenly, i.e. through an inheritance, settlement or real estate sale will view risk one way. Others say depending on how one was raised will determine attitudes, perceptions and reactions. While one’s risk tolerance can help determine how they may behave financially there are also different risks behind various investments.
Minimizing Risk
It is impossible to entirely remove risk from any investment. Each investment has some degree of risk. The goal to successful investing is to understand your personal level of risk. This is known as “risk tolerance,’ and invest accordingly.
The element of risk being present in investments does not mean you will lose all of your money. This is obviously a worst-case scenario although always a possibility. Generally speaking, however, an advantageous return on your investment may not be possible without some risk, meaning it’s possible that you may lose some of your original investment or principal. Asset allocation is one way we aim to exercise some control over how we invest.
Risk is a fact of life for investors. How we manage it is reflected in investment returns.