Know Your Risk Tolerance


When it comes to investing, risk and reward go hand in hand. The phrase “no pain, no gain” – comes close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: all investments involve some degree of risk. We remind our clients when investing in securities – such as stocks, bonds, mutual funds, or ETFs – it’s important that you understand that you could lose some or all of the money you invest.


The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you may make more money by carefully investing in higher risk assets, such as stocks or bonds, than if limit yourself to less risky assets. On the other hand, lower risk cash investments may be appropriate for short-term financial goals.


An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.


Before we talk about specific risk tolerances, let’s pull back for the bigger picture first. What is a “risk tolerance”? A risk tolerance in investing refers to the degree in variability of investment returns an investor is willing to withstand. We believe that understanding one’s risk tolerance is an integral part of assembling a client’s portfolio, helping us to define goals and understand your values.


How do we determine your risk tolerance? We use a proprietary online questionnaire which each of our new clients take. This helps us to give you a definite roadmap for success.


Many investment websites offer free online questionnaires to help you assess your risk tolerance. Some of the websites will even estimate asset allocations based on responses to the questionnaires. While the suggested asset allocations may be a useful starting point, keep in mind that the results may be biased towards financial products or services sold by companies or individuals sponsoring the websites.


There are many things to consider when determining the answer to a seemingly simple question, “What is my risk tolerance?” The answer will vary based on your age, experience, net worth, risk capital and the actual investment or trade being considered. Once you have thought this through, you will be able to apply this knowledge to a balanced and diversified program of investing and trading.


Spreading your risk around, even if it is all high risk, decreases your overall exposure to any single investment or trade. With appropriate diversification, the probability of total loss is greatly reduced.


Knowing your risk tolerance goes far beyond being able to sleep at night or stressing over your trades. It is a complex process of analyzing your personal financial situation and balancing it against your goals and objectives.