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What's Your Risk Tolerance

What's Your Risk Tolerance

August 28, 2018

If you have ever met with a financial advisor, more than likely you’ve heard the term “risk tolerance”. This is not some trendy catchphrase. But many people have heard it so many times the importance of its meaning sometimes get lost.

There are a lot of factors that can influence someone’s risk tolerance. Some are practical and some are emotional.

Generally, younger people can take on higher risks in their retirement accounts, since they have a longer time to recover from downturns, and older folks can’t afford to take the same risks.

Any investments that are earmarked for goals such as saving for college or buying a house, obviously, have different time frames that need to be considered compared to retirement accounts.

Regardless of age, it is common for people to, initially, take on more risk than is actually in their comfort zone…with the hope of getting greater gains.

It is human nature for investors to feel euphoria when the markets are up and say they are willing to take on more risk and then feel much differently when the markets go down and decide they want to take on less risk.

But in reality, an individual’s risk tolerance should be based on their fundamental investment strategy and goals and not be driven by recent fluctuations in the markets or the daily headlines.

When folks change their risk tolerance based on emotions, many times they regret it later. When folks adjust their tolerance based on life-changing circumstances, that’s a different story.

Whatever your age or wherever you’re at in life, keep in mind that determining your risk tolerance when making investment decisions is very important.