When it comes to investing, everyone has a different risk tolerance. Your co-worker or neighbor
may not give a second thought to an investment that leaves you with a sinking feeling in the pit of your stomach. But, risk tolerance isn’t a matter of “good or bad.” Whether you thrive on risks or avoid them at all costs, the important point is to know the level of risk that best suits you.
Investing typically involves a tradeoff between risk and return. Returns come in the form of
interest or capital appreciation. Generally, the riskier an investment, the greater the potential
return. This is because the market theoretically “rewards” investors for assuming risk, which is
the potential for loss. Investors in pursuit of higher returns must be willing to assume the
likelihood of loss associated with more volatile investments.
But, not everyone wants to take a higher risk in the hope of achieving a larger return. Some
investors are perfectly satisfied receiving smaller returns on investments that carry lower levels
of risk. The key is to find the right level of risk that potentially allows you to achieve your
desired return. . .while keeping your stomach jitter-free!
What factors affect risk tolerance? Your age, stage in life, personal temperament, financial
goals, and planning time horizon each play a role. Here is a brief discussion of these points:
Age and Stage in Life. Generally, the younger you are, the more risk you can assume. If you are single, you may be able to afford more risk than a married couple with children. And, if you’re just starting out in the work world, you may be more comfortable with higher-risk investments than if you are retired or approaching retirement.
Personal Temperament. At every stage of your investing life, it is important to evaluate how well you would handle the possibility of losing any funds you invest. Though you may find a roller coaster ride thrilling, you may not enjoy a wild market “ride.” The stock market, for instance, has historically risen over the long term, yet it has experienced wide short-term fluctuations. How well would you have handled the 1973 to 1975 recession, when the stock market dropped by 46%?
Financial Goals and Planning Horizon. It’s also important to consider how many years you have to meet your financial goals. Generally, the earlier you begin saving, the more risk you can afford to assume. Though you should never take on more risk than you are comfortable with, you should also recognize that the amount of risk you are willing to carry affects the return you can potentially expect to achieve.
Periodic Reviews - A Must
Knowing your “comfort level” for risk can prove invaluable when you must make investment decisions. With proper planning, you can develop a portfolio that balances your risk tolerance with your financial goals. Since risk tolerance changes with time and circumstances, it’s also a good practice to reassess your investing strategies as you start a family, approach retirement, or experience other major life changes.
Copyright © 2015 Liberty Publishing, Inc. All rights reserved
Distributed by Financial Media Exchange
Disclosures:
Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment-related content made reference to directly or indirectly in this material will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted.
No current or future client should assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. As with any investment strategy, there is the possibility of profitability as well as loss.
Apella Wealth does not provide insurance services or legal advice and nothing either stated or implied here should be inferred as providing such advice. eMoney is not affiliated with Apella Wealth and the content shared in this blog post has been provided with the express permission of the respective parties.