Risk Tolerance

Risk Tolerance

April 22, 2024

How much risk is appropriate for you to take with your investment portfolio?  This is another one of those questions that is difficult to answer as it is highly specific to each individual and their unique situation.  I recommend consulting with a fiduciary financial advisor that can help you answer this question for your specific circumstances.  However, there are two main components of risk that should be considered when answering this question and we will examine those here.

Ability to take risk.  How much risk are you able to take in your situation.  There are a few common things that help dictate your ability to take risk.  One, is simply your age/time horizon.  Academically speaking, a person who is younger with a longer investment horizon typically has an ability to take on more risk than a person who is older.  The younger person, in theory, will have the time to ride out the ups and downs of markets and benefit from returns over a long period of time.  Another item that can determine your ability to take risk is your savings account.  If you have enough savings in your savings account to cover yourself if a short term, unexpected spending need arises, it allows you to potentially take greater risk with your investment portfolio since you are less likely to need those invested funds in the immediate future. 

Willingness to take risk.  This is a gauge of how you feel about taking risk.  Do market fluctuations cause you to lose sleep at night?  Or are you comfortable that even if the market goes through some period of volatility, that eventually things will stabilize and move in a positive direction again?  Or, even worse, does negative short-term market behavior cause you to rush to your portfolio and make regular changes in reaction to what is happening?  If so, that would indicate that you have a low willingness to take risk

In an ideal scenario, when a client's ability and willingness to take risks align, it can result in a portfolio that carries an appropriate level of risk to help achieve your goals.  If these two factors do not match up, it is important to have a good discussion with your advisor about actions you can take to help you get there.