Click Here for a Video on Investment Risk Tolerance
When developing a financial plan for a client, one of the key factors that we have to take into consideration is their investment risk tolerance. Having a good understanding of both how much risk they can and are willing to take with their investment portfolio will help to build a base for the type of assets their money should be invested in.
When trying to understand what someone’s risk tolerance is, we ask a series of questions that we wanted to share with you today to potentially help you gauge what your investment risk tolerance is.
Time Horizon:
One of the first key factors to understanding your risk tolerance is to gauge how long your time horizon for your investments is. Is this money that you are going to need in a few months, or is it an investment account that you are using for retirement which you expect to be in 20 years? Having this understanding can help you properly estimate how much risk you may be able to take on your investment allocations.
Investment Experience:
Your investment experience is also a critical factor to understand when coming up with your risk tolerance score. Those who are more experienced with the potential volatility the stock market can bring to one’s investments might be a bit more prepared to weather through the highs and lows of their portfolio value.
Your own risk nature:
It is also very important to understand how you generally feel about taking risks in your life. Some people are naturally risk averse. Even if their overall financial situation is in good shape and would allow for them to take on more risky assets, such as growth oriented equities when compared to U.S. Treasury Bonds, they may not feel comfortable doing so and that is something that can not be ignored when building their financial plan.
What are your investment goals:
Are you looking to buy a home with the money, save for your child’s education, pass down the money to the next generation? Answering this question can help give you an understanding of how much risk you may be able to take with the money you would like to invest.
The Final Word:
Of course, there are other factors that you should take into consideration when trying to gauge what your risk tolerance is, but the above questions are a good start to your understanding. At the end of the day, when evaluating one’s risk tolerance we have to take into consideration both the risk they are WILLING to take and the risk they CAN take based on their goals, time horizon and risk nature.
Thanks for reading! If you would like to check out a video we produced on this topic, feel free to click here: Understanding Your Risk Tolerance Video.
Do you have questions you would like us to discuss here? Click the link to let us know and we hope you found this helpful!
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Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.