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3 Questions to Help you Determine your Financial Risk Tolerance

3 Questions to Help you Determine your Financial Risk Tolerance

October 12, 2022
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In the financial world, the term “risk tolerance” is thrown around a lot. But what does it actually mean?

Risk tolerance is the degree of risk that an investor is willing to endure given the volatility in the value of an investment. An important component in investing, risk tolerance often determines the type and amount of investments that an individual chooses.

Investopedia

This is why financial advisors focus on your risk tolerance when creating your financial plan: it’s different for everyone and should be taken into account as they learn about your goals and values. As we’re experiencing major fluctuations in the market, 2022 has been the perfect example of why understanding each individual’s risk tolerance is so important.


3 questions to consider about risk tolerance

Whether you’re handling your investments on your own or working with a professional, there are several questions you should consider when it comes to risk tolerance:

  • Are you a risk taker in general?
  • If you saw a drop in your portfolio are you likely to stay the course or want out?
  • How important to you is it to hit your goal?

Risk tolerance also takes into account other factors such as your age, time horizon, and income. In other words, your risk tolerance should and will change over time.


When should you adjust your portfolio?

You might be looking at your retirement accounts and wondering if you need to make some changes. (I would imagine almost every investor has had to take a deep breath at some point this last year.) However, regardless of what is happening in the markets, you should be asking yourself these questions over time:

  • Has your financial situation changed?
  • Has your time horizon for these funds changed?
  • Have your goals for these funds changed?

To be clear, adjusting your portfolio at certain intervals isn’t an exact formula for success. You have to constantly review your portfolio and check in with your investment objectives to make sure they are aligned.

When is it time to speak with a professional?

When it comes to making decisions about money, people are often emotional – and making important financial decisions based on feelings can lead to bad decisions.

Working with an impartial financial advisor who takes the emotion out of it, provides market perspective, and helps you review your investment goals regularly will hopefully keep you on track or make the right changes when necessary.