The term “risk tolerance” gets thrown around a lot when it comes to investing. So, what does it mean, and how does it relate to retirement?
In simple terms, risk tolerance is how comfortable you are with potentially losing money on an investment.[1] If you don’t want to lose any money at all from your investments, you would be considered to have low to no risk tolerance.[1] If you are okay with potentially losing some money, you would be considered to have moderate risk tolerance.[1] And if you are comfortable with potentially losing a lot of money, then you are considered to have aggressive risk tolerance.[1] These are all relative terms and may manifest differently given your unique financial situation and the asset or investment in question.
So, what is the potential benefit of having an aggressive risk tolerance? Why would someone be okay with potentially losing a lot of money? A well-designed aggressive portfolio may be desirable because, generally, it comes with the possibility of relatively higher returns than less risky portfolios.[1] This style of investing is not for everyone and is not guaranteed to pay off. It is entirely possible to lose money from this style of investment, but some people are looking for this kind of investment based on their specific financial situation.
Conservative portfolios tend to be important when it comes to retirement because as a person approaches retirement age and is closing in on their total wealth level, they often look to reduce the risk of losing their investments. They might shift their assets into less risky vehicles like CDs and short-term T-bills.[1] Again, this strategy isn’t right for everyone, but it is an investing approach commonly incorporated into a retirement strategy.
Risk tolerance is a hard thing to figure out. Some people have an innate sense of what they are willing to risk, and for others, it takes time and experience before they come to understand what is best for their situation.
The finance world is complicated. There are many different puzzle pieces to your wealth management picture. If you are interested in talking with someone to guide you through that world, consider reaching out to one of our professionals today for a complimentary review of your situation.
[1] https://www.investopedia.com/terms/r/risktolerance.asp
This article is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Risk tolerance is an investor’s general ability to withstand risk inherent in investing. The risk tolerance questionnaire is designed to determine your risk tolerance and is judged based on three factors: time horizon, long-term goals and expectations, and short-term risk attitudes. The adviser uses their own experience and subjective evaluation of your answers to help determine your risk tolerance.
There is no guarantee that the risk assessment questionnaire will accurately assess your tolerance to risk. In addition, although the advisor may have directly or indirectly used the results of this questionnaire to determine a suggested asset allocation, there is no guarantee that the asset mix appropriately reflects your ability to withstand investment risk.
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Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Concorde Investment Services, LLC. (CIS), member FINRA/SIPC. Insurance Services offered through Asset Strategy Financial Group, Inc. (ASFG)”. ASA, CIS and ASFG are separate companies.
