A Guide to Risk Tolerance and Your Investment Portfolio
Before you can create a robust investment portfolio, there are numerous factors you should consider, which include everything from the types of investments you'll make to the level of risk tolerance you have. Some investors have a high risk tolerance, which means that they're willing to make risky investments despite the ample risk of substantial portfolio losses. There are also many investors who adopt a strategy that relies on low risk tolerance. Understanding your own risk tolerance is crucial for long-term investment success.
What Is Risk Tolerance?
Risk tolerance is the amount of loss that an investor is willing to manage while making any kind of investment decision. Let's say that you wish to invest in stocks but only want to consider companies that have been displaying a consistently strong performance for many years. In this scenario, you may have a relatively low risk tolerance. There are numerous factors that determine the amount of risk an investor is prepared to take.
Once you identify your risk tolerance, you'll be able to plan your entire portfolio and better understand the types of investments you'll be able to make. If you have a high risk tolerance, you may be fine with making more high-risk investments and less conservative investments.
Identifying your risk tolerance also allows you to implement asset allocation with your portfolio. Depending on your ability to tolerate a certain amount of risk, you can divide your investments among various assets, which include everything from cash to stocks. If you have a low risk tolerance, it might be advisable to allocate 65% of your investments to bonds.
Risk tolerance is usually separated into three distinct categories, which include conservative, moderate, and aggressive. There are several methods you can use to measure risk tolerance, each of which has its own merits and drawbacks. Before you start making investments, you should know what your current risk tolerance is.
How to Measure Risk Tolerance
There are numerous factors you should take into account when measuring your own risk tolerance. For example, what kind of investment timeline are you thinking of? If you need to reach a certain amount of money over a few years, a lower risk tolerance might be best to avoid issues where you can't reach your goals because of one poor investment. With a longer time horizon of 15-20 years, making riskier investments isn't as damaging to the value of your investment portfolio.
You should also take some time to assess your financial goals, which differ from person to person. The purpose of financial planning isn't solely to gain a high amount of money. By identifying your financial goals, it's significantly easier to develop an investment strategy that gives you the returns necessary to reach your goals.
When measuring your risk tolerance, you might also want to take your age into account. Younger investors are oftentimes willing to take more risks in comparison to older investors. If you're relatively young, you have more time to handle significant market fluctuations.
Make sure you determine what size you would like your portfolio to be. Larger portfolios are invariably more tolerant to risk. Let's say that you have a $10 million portfolio. It will be much easier for you to offset your losses from a single risky investment in comparison to someone who has a $1 million investment portfolio.
You should also measure your own comfort level when you're trying to determine what your ideal risk tolerance is. Every investor is going to handle risk differently. As touched upon previously, some investors are able to take risks on a regular basis without feeling the pressure of doing so. On the other hand, the ever-changing market can be highly stressful for certain investors. Once you know how comfortable you are with taking investment risks, you should be able to quickly identify your risk tolerance.
When to Assess Risk Tolerance
If you're just getting started with making investments, assessing your risk tolerance isn't something you should only do once. In fact, you should regularly reassess your risk tolerance, especially when life circumstances change. For example, you may want to make less risky investments if you have a child and want to make sure that they have enough money saved up for college.
As you get closer to retirement, you might lower your risk tolerance to make sure you don't lose too much of your savings with one bad deal. You should also reassess your risk tolerance if ever your goals change. Your financial goals shouldn't be fixed. A crucial aspect of being a successful investor is adapting to your situation and knowing when to change the types of investments you put in your portfolio.
Seek Assistance from a Financial Advisor
By partnering with a financial advisor like Attentive Investments, you can more effectively identify and manage risk in accordance with your financial goals. Financial advisors are responsible for helping people manage their assets and create detailed plans for their financial futures. They can help you determine how to use your investments to plan for a budget or retirement.
There are many reasons why you should consider hiring a financial advisor. If you go through a life event, you can benefit from having a financial advisor by your side. Whether you're graduating college or opening a business, you may need to reevaluate your current and future financial situation. The same is true if you want to make changes to your investment portfolio and the level of risk you take on.
Having a financial advisor by your side is also recommended if you lack experience with making investments. If you're a beginner, don't hesitate to obtain help from someone who knows how to avoid some of the more common investment mistakes.
Once you hire a financial advisor, they can assist you in developing a strategy by helping you realize how to achieve your financial goals. For example, an advisor can inform you about the types of investments that allow you to reach your goals on your ideal timeline.
Here at Attentive Investments, we can help you implement the best investment strategy and accomplish your individual goals. When it comes to risk tolerance, we use a combination of rule of thumb, a detailed questionnaire, and personal conversations to make a comprehensive risk assessment. Call us today to schedule a free consultation with one of our investment managers.