Risk tolerance is unique to every investor. It depends on factors such as age, lifestyle and personality. Some investors can lose a few thousand dollars in a down market and not even blink. For others, even the loss of a few hundred dollars is a big deal, says financial planner Dwayne Rettinger of Investors Group Financial Services Inc., adding that risk tolerance is a balance between the financial and the emotional. The financial side involves the creation of a solid, long-term financial plan. The emotional part of the equation is about making investment choices that don’t cause stress or negatively impact your life.
Entrepreneurs may be particularly concerned about their investment risk tolerance for various reasons. For instance, they may be investing their own personal capital into their startup or they may have asked family and friends to invest.
Here are five ways to help you figure out your risk tolerance:
1. Do you understand market fluctuations?
Financial education can help grow confidence and understanding of your investments, explains Dwayne Rettinger. There are many free educational courses online that can provide a resource for beginning to educate oneself on market dynamics.
2. Have you experienced financial losses in your portfolio?
If so, how did those losses make you feel? Did you want to back off your financial plan and stay on the sidelines until the downturn passed or did you stick to your plan, believing that a downturn is the best time to buy undervalued investments? Rettinger says your answer to that question will help determine your risk tolerance.
3. Are you afraid of uncertainty?
Your tolerance for uncertainty at work and at home can be good indicators for your tolerance for uncertainty when it comes to your investments.
4. Do you have other money elsewhere?
If you have other sources of income, such as a large expected inheritance or a defined benefit pension from a previous job, you may be able to take on more risk in your portfolio. Finance professor Moshe Milevsky, a financial author, says if you have a well-paid stable job with a good pension and benefits plan, you can consider yourself a “bond” and invest mainly in stocks, as you are able to take on much more risk.
5. Are you aware of what you can lose?
A good financial advisor can explain potential losses in terms you can understand, Dwayne Rettinger explains. Instead of saying, you’ll lose 30% of your portfolio in a market crash, good advisors will also put those losses in dollar terms, and say you’ll lose $30,000, for instance.
Managing risk and maximizing your potential for higher returns at the same time can be done with a solid financial plan, Dwayne Rettinger advises. You can spread your risk by creating a diversified portfolio and use asset allocation to assemble a blend of investments that suits your financial goals and takes care of any risk tolerance worries.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.