Your Money: What is your risk tolerance?

By Matt Solberg on March 11, 2023.

The concept of risk is unique to each person: it depends on your stage in life, your background, your aspirations, lifestyle and spending habits. Your risk profile may change over time as you move through different life stages and as your goals, circumstances and needs evolve. Keep in mind risk can mean something different for each individual, but here are some concepts to help you understand how to measure your own risk tolerance and capacity:

Time horizon

Young people with a longer time horizon are generally more willing to take on risks, as they’ll have more time to make up for any potential downturns. Those who have left the workforce or are on the verge of doing so are generally less willing to take significant risks, since the retirement savings they have accumulated to date will be needed to sustain them for the rest of their life. They’re likely to be more focused on preserving their capital.

Net worth

Your net worth is your assets minus your liabilities. You may feel more inclined to take greater risks if you have a stable income, little or no debt and if you have funds set aside that aren’t needed for paying bills. If you’re not struggling to cover all your monthly expenses, then you might not be as concerned about potentially losing money on an investment because you’re not relying on those funds.

Investment knowledge

Those who have deeper understanding of financial markets may have a better idea of the benefits and drawbacks of different asset classes or specific investments and can then take calculated and carefully considered risks, with an adviser’s help. Those who don’t have as strong a grasp of investment concepts may be even more dependent on an advisor’s guidance and remaining in a balanced portfolio of stocks and bonds.

The bottom line

Your attitude toward risk is ultimately determined by your individual personality. Do you make emotional decisions? Do you become distressed when markets fall? Are you more of a wait-and-see person? Do you check the value of your portfolio frequently or do you wait until quarter-end? While working with an adviser can help you avoid knee-jerk reactions to market volatility, your ability to stomach those losses is related to your personality more than anything else. as always, talk honestly with your adviser about your risk tolerance. They can help you design a strategy and asset mix that’s right for you.