What is Your Investment Risk Tolerance?
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What is your Investment Risk Tolerance?
Join Dave and Nick as they discuss the all-important risk tolerance.
This is a big subject and comes up all the time when we’re working with clients. How much of a risk do you feel comfortable taking in your investment strategy?
When you look at a statement or look at your account online and call me up and say, “I can’t take this anymore. We have to do something
different.”
different.”
That’s my everyday working definition of a client’s risk tolerance. It’s interesting because it can be a moving target. There’s a lot that goes into risk tolerance. right? If things are going well and everything seems great, people tend to have a higher risk tolerance than when the market’s been down. So trying to get at their real risk tolerance can sometimes be tricky.
How you feel about the markets and how it affects you emotionally can trigger you to make poor investment decisions.
How Do You Measure Risk Tolerance?
We show people different combinations of results and ask if they would prefer this slow and steady where it doesn’t add up to as much over time but doesn’t cause you as much angst in the meantime. Or, are you okay with lots of ups and downs if the end result is likely to be higher?
If your risk tolerance is lower you can do things to mitigate your anxiety. Such as setting a schedule to check your stocks and try not to obsess about your portfolio returns. For a lot of people, this means looking at it less. Also, turning off the news especially when the economic news is bad, and reminding yourself that it is a long game.
You can also take a look at the past in times of market volatility and focus on market recovery. Concentrate on the term and don’t obsess and worry over what’s happening right now and how bad things seem. It’s helpful to take a big-picture approach when you’re trying to improve your volatility composure.
Types of Risk Personalities
We also consider someone’s risk personality. For instance, are you a Risk Seeker or are you a Stability Seeker?
Your Risk Personality relates to how you think about investing and whether you’re a default conservative or a default risky person. Having an understanding of this really helps when we’re putting together Portfolios. There is a pendulum with this too.
Your Risk Personality relates to how you think about investing and whether you’re a default conservative or a default risky person. Having an understanding of this really helps when we’re putting together Portfolios. There is a pendulum with this too.
For example, a client could buy a stock with 2% of his million-dollar IRA or go all in on a stock all in on this stock. That’s a whole different conversation and our job is to help people make decisions that fit their risk capacity.
It definitely flows both ways. There are people who are over-excessive and those who are too conservative. So we make sure we understand who you are so we can give you a good understanding of some of the things that you need to focus on to get the results you are looking for.
Long Term Investors
Often we will see with long-time investors that they score pretty low, in general, on their risk tolerance, but it is not uncommon for their investing confidence to raise their risk preference. They know that while they’re conservative by nature they need to take a moderate risk in their portfolio to get the results they want and they’re comfortable with that.
This is one of the strong points of this particular system.
As far as improving or thinking about your risk personality, you could spend about 30 minutes a month taking a look at your investments and making sure you’re strategically invested versus speculatively invested. Touch on strategic versus specific.
About Shotwell Rutter Baer
Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.
Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.
Call us at 517-321-4832 for financial and retirement investing advice.
