I want my clients to sleep at night and not worry about their investments. If this pandemic has taught us anything about investing, it’s that some folks aren’t comfortable with risk in volatile markets. Determining your risk tolerance is a key step in helping your financial advisor develop an effective investment strategy for you. But what is risk tolerance?
Risk tolerance is how much of a loss you're prepared to handle within your portfolio. Generally speaking, your risk tolerance will go down as your age goes up - that is, you will become less comfortable with aggressive investing the nearer you get to retirement. However, each situation and person is different.
Typically, there are three different risk tolerance categories that people fall into - Aggressive, Moderate, and Conservative. Which category best describes you?
Aggressive Risk Tolerance
Those in the aggressive category tend to have a broad understanding of the market. They want maximum returns on their investments and they are willing to accept the maximum risk that comes with reaching for that goal. Usually, the younger you are, the more likely you are to fall into the aggressive category.
Moderate Risk Tolerance
Those in the moderate category are in the middle. They want their returns to steadily increase and are willing to accept some risk to their initial investment. However, they take a balanced approach, often investing with a portion of their portfolio in extremely steady funds and another portion in a higher risk/higher reward fund.
Conservative Risk Tolerance
Those in the conservative category want to see growth but adhere to a “slow and steady win the race” motto. They do not want to see losses and are not willing to take risks that might decrease their initial investments. Commonly, those at or nearing retirement age will move into this conservative risk tolerance category even if they have previously been in the aggressive or moderate risk tolerance category.
There is no right or wrong risk tolerance category. However, it is very important to know which category you are most comfortable with for your lifestyle and investments. Pick the wrong one and you could be more inclined to overreact with market ups and downs - negatively impacting your long-term investment goals.
Do you have questions about your investments? Please feel free to reach out.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, may be worth more or less than the original investment.