Video FAQ: How Do You Measure Risk Tolerance for Investments?

In this video FAQ, we discuss two approaches for evaluating and managing risk tolerance.

Risk tolerance is actually a measure of volatility and there are two schools of thought on how we measure risk tolerance for your investments.

One approach is based off of your behavior and your emotions connected to your investments. How much downside or volatility can you actually handle?

The second way is to determine risk tolerance is based off of financial circumstances and goals around your financial plan. We look at expectations around stable income, as well as downside volatility, time horizon, liquidity needs, and any other constraints you may have. For example, you may have a concentrated position that you can’t sell because of taxes. The type of relationship you have with your financial advisor can also affect your risk tolerance. It has been proven that individuals that talk to their advisor on a more frequent basis tend to stick with their investments through downturns.

It’s important to consider that if your risk tolerance is moderate to high and your financial circumstances indicate that it should or could be lower, you need to ask yourself why am I taking this extra amount of risk? On the flip side, if your ability to take risk is lower, and the financial plan says you need to take risks at a higher level to meet your goals, either you need to increase your risk tolerance to match that (understanding that you’re going to have more volatility), or you need to decrease your spending to match what you’re currently supports.

If you would like to talk to a financial advisor about the level of risk that is right for you and your investments, please do not hesitate to reach out to us at info@clientfirstcap.com.