Risk Tolerance

Risk Tolerance — How do you really feel about risk?


Risk Tolerance — How do you really feel about risk?

Some people love taking big risks. They get a thrill out of storms that rock the boat. Others avoid risk at all costs. They only want to drift in perfectly calm waters. Most of us fall somewhere in the middle. And when it comes to retirement investing, it’s probably good to be somewhere between those two extremes.

Get personal with your risk personality

Every investment decision you make involves dealing with some kind of risk. So it’s a good idea to be honest about your risk personality. Where do you fall in that vast middle ground between wild and mild? Do you lean more towards playing it safe or are you okay with sometimes going a little further out on the edge? Knowing where you fall on the risk tolerance scale can help you make more informed investment decisions.

Risk Personality
The risk spectrum spans from conservative to aggressive, with many points in-between.

Consider outside factors

Your tolerance for risk goes beyond your personality. It’s also driven by:

  • Your time horizon — The more time you can stay invested before you need to withdraw your investment the more you can focus on growth. Although past performance is no guarantee of future results, historically, stocks have provided the best growth potential over the long term. Stocks carry higher market risk — the risk of your investments losing value — but with a long time horizon, you may be able to make up for any losses.
  • Your retirement income goals — If you’re planning on living a very long, healthy life and traveling the world during retirement, you need to accumulate more money — meaning accept more risk — than if you plan to sit in a rocking chair on your front porch.

Time your tolerance

As you get closer to retirement, your tolerance for risk may decrease. Your desire to protect your savings will begin to trump your desire for maximum returns. You’ll probably want to lower your market risk by reducing your stock allocations and increasing allocations to more conservative investments, such as bonds, guaranteed products like annuities and money market accounts.

Make it a good fit

There’s no right or wrong risk strategy. First, understand your risk profile, then find a balance between the returns you need to achieve your goals and the level of risk you’re comfortable with. You can always loosen things up if your risk tolerance feels like it’s cinched a little too tight or tighten the reigns if you're not comfortable with you current level of risk.