Each and every one of us has our own risk tolerance which should not be ignored when considering making any type of investment. Any good financial planner knows this and they should make the effort to help you determine what your risk tolerance is.
Then, based on this information, they should help you to build a portfolio that is aligned to your level of risk.
Determining one’s risk tolerance is based on several different criteria and there are different ways to look at how you should assess the risk you need to take. Firstly, you need to know how much money you have to invest, what your investment and financial goals are and what time horizon is involved. Then you need to consider the actual risk you are prepared to take.
Due to the emotional aspect of investing, there are various ways to look at it.
Let’s say you plan to retire in ten years and you’ve not saved a single penny/cent towards it. You could view this in two ways:
- You need a higher risk tolerance because you will need to do some aggressive investing in order to reach your financial goal.
- You may consider that as retirement is looming, you do not want to take unnecessary risks. If the markets were to crash it would affect your situation, therefore a more balanced portfolio (lower risk tolerance) would be better suited.
On the other side of the coin, if you are in your early twenties and want to start investing for your retirement now, you could share the same views.
- You should have a higher risk tolerance because you are young enough to ride out any market turmoil, maybe restructuring to a more cautious profile nearer the end goal.
- You should take a lower risk level and be happy with lower gains (potentially) but the end result will achieve what you require. You can afford to watch your money grow slowly over time.
There are more factors to consider in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens.
This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good Financial Planner should help you determine the level of risk that you are comfortable with and help you choose your investments accordingly.
Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together, it’s emotional.
Prior to working with any clients I insist on completing a detailed risk tolerance questionnaire. This will tell me exactly what your attitude to risk is and a suitable portfolio can be devised to suit you individually.
If you are interested in investing or saving for the future then get in touch to discuss the opportunities available and, just as importantly, the risks associated.
If you already have an investment portfolio and feel that it was never rated against your own risk tolerance then let me know. I am happy to discuss further and go through the questionnaire to ensure that what you have already done is suited to your circumstances.
This article is for information only and should not be considered as advice.
This article is written by Chris Webb The Spectrum IFA Group
More on risk and investing in different assets
- Bank Accounts and Cash
- Precious Metals
- Alternative Investments
- Portfolio Planning & Different Ways to Invest
- Discussing investment risk