Evaluating Your Risk Tolerance
Everyone has a moment when the stock market dips and they think about selling everything invested in it. This is regardless of whether you know that the stock market has natural rises and falls that create consistent growth over time. But not everyone does sell off their stocks and mutual funds. The decisions you actually make and what causes it represents your unique risk tolerance level.
Throw away labels such as conservative or aggressive in regards to your risk tolerance.
One person’s definition of conservative investing is another person’s definition of aggressive investing. For instance, let’s say you can consider yourself to have a high risk tolerance. Yet, you only have 50 percent of your investments in the stock market when most financial planners would advise someone to have 75 percent of investments in the stock market at your age. Instead, I go by numbers from a survey combined with past investing patterns.
Use software to find your number
I use Riskalyze. It asks questions several different ways to determine what level of risk to earn what reward you’re willing to accept. For instance, you may be asked if you are willing to accept the possibility of a 6 percent loss if the upside is you could receive a 15 percent annual profit. Questions are asked several different ways to produce accurate results.
Fine tune your risk tolerance by past experience
If the software told you what your risk tolerance was without fail, you wouldn’t have talk to your financial planner. They’d just look at survey results. Instead, your planner will temper the Riskalyze results with the real choices you’ve made in the past. For instance, did you panic and oversell in a past market dip or did you take on too much risk and regret it? While the Riskalyze survey takes just a few minutes, it will take an hour to build your investment portfolio.
Evaluating your risk tolerance is a long-term activity
There’s a testing period after the initial portfolio is created. After all, your risk tolerance changes over time. Your risk tolerance may be different as you approach retirement. It may also feel different if you get a large raise or your salary decreases. A new child or a new grandchild can also make a couple rethink how money is invested. A good financial planner checks in with you every so often to make sure your portfolio is meeting your expectations for both growth and security.
Risk tolerance is a team number
Two members of the same couple may have completely different levels of risk tolerance. You may know this already if one of you is considered a spender or a saver. Your financial planner should help you find an investment mix that fits both of your needs for security. However, sometimes you can use a strategy where each person picks a strategy with half of the couple’s total investable funds.