What is your risk tolerance? You are probably wondering how I should know? But that’s the wrong question. The real question is, how can I know?
Determining how much risk an individual can tolerate isn’t as easy as you would imagine. Several factors, such as age, experience, priorities, investment goals, and amount of available liquid capital, can all influence the level of risk a person would be willing to take.
Risk tolerance also takes into account two dimensions; Ability & Willingness. Therefore, quantifying risk tolerance is no easy task. However, there are ways you can determine your risk tolerance and set up achievable investment goals, which is a strategy that is essential for successful wealth management, especially for high-net-worth individuals.
Thus, if you find yourself asking the question “what are my future investment goals?” or “how much risk should I be willing to take with my investments?” you have come to the right place. In this article, we will answer these questions and a lot more.
What Is Risk Tolerance?
To build a suitable investment portfolio it is important to understand your ability and willingness to take risks. All investments have an associated level of risk. Nothing in life is ever guaranteed. And the same is true for investments.
However, the level of risk for some investments can be significantly higher than for others. For example, investments in heavily volatile markets such as cryptocurrency or tech can be quite risky, but as it is with riskier investments, the rewards also tend to be a lot greater.
Other investments such as bonds, money market funds, high-yield saving accounts, and blue chip stocks are considered ‘safe investments’ but are also less rewarding.
Other types of investment risks include market risks, liquidity risks, credit risks, inflation risks, longevity risks, and much more.
How Can You Determine Your Risk Tolerance?
There is no magic formula to determine one’s risk tolerance. This is because various factors such as age, financial goals, investment time horizons, and more, can all influence the level of risk an individual would be willing to tolerate.
The best way to determine your risk level is through self-reflection and assessments that include asking yourself a series of questions such as “how would you most likely react to a substantial loss?”, “what would the financial implications be if you were to lose the money?”, “how did you react to an investment loss in the past?”, “how confident are you with the investment you are about to take?”, “How much of an investment loss would you be willing and able to bear?”, etc.
Providing honest answers will tell you a lot about how risk-averse you are, and even help determine your true investment goals. Based on your assessment, you will find you have either an aggressive risk tolerance, a moderate risk tolerance, or a conservative risk tolerance.
Once you have determined your risk tolerance you can now build an investment portfolio that matches your appetite for risk and aligns with your investment goals.
How Can You Define Your Investment Goals?
Along with determining your appetite for risk, it is also essential to define your investment goals. Ask yourself, “what are your short-term and long-term goals?”, “what is the timeline that you can set aside to allow your investments to mature?”, “When do you plan on withdrawing your investments and why?”, “How much holding power do your current finances allow for?”, “Are you seeking short-term or long-term returns?”, etc.
Honestly answering these questions will help you define your investment goals which can then be aligned with your current financial situation to give you a better picture of the ‘ability’ part of your risk tolerance level.
It is also essential that your investment goals are specific and not vague. They should also be achievable and measurable goals that aren’t too far off the realm of possibility. Finally, your investment goals should alway have a timeline as this can help you keep track of how close or far off you are to achieving those goals at any given time.
How Can You Align Risk Tolerance With Your Investment Goals?
If you have long-term investment goals and have an aggressive risk tolerance your portfolio should contain investments that have high-risk/high-reward potential. On the other hand, if you have short-term goals and a conservative risk tolerance level, then you should have a portfolio with mainly risk-free investments such as bonds, blue chip stocks, and cash.
You can also have a combination of short-term and long-term investment goals and a moderate risk tolerance, in which case, your investment portfolio should contain a combination of high-risk and low-risk investments.
By accurately assessing your risk tolerance and aligning them with your defined investment goals you can build an investment portfolio that accurately reflects your financial circumstances, your intended time horizon, and your aversion to risk. This should help you get one step closer to achieving your financial goals.
Aligning your risk tolerance to your investment goals can be a complex process that takes into consideration your current financial situation and balances it with your financial goals.
This is why it is always recommended to consult with a trusted financial advisor before sticking to any financial plan. These experts can ask the right questions to determine your risk tolerance, assess your current financial situation, and help you decide on the best course of action to achieve your short-term and long-term goals.
Finding The Right Financial Advisor To Guide You Along Your Investment Journey!
Aligning your risk tolerance to your investment goals can be a complex process that takes into consideration your current financial situation and balances it with your financial goals.
This is why it is always recommended to consult with a trusted financial advisor before sticking to any financial plan. Eastport Financial Group Inc, specialize in wealth management and financial advisory services. We have helped countless individuals, businesses, and organizations achieve their financial and investment goals.
Our experts can ask the right questions to determine your risk tolerance, assess your current financial situation, and help you decide on the best course of action to achieve your short-term and long-term goals.
To learn more about our services visit our website or call us at +1 902 474 5433.
