You take on risk whenever you make an investment, but what is the right level of risk for you? It’s a financial decision, but you can’t ignore the emotional components.
Just how do you feel about risk, anyway?
Risk tolerance refers to your basic comfort level with the stock market’s volatility. It is generally defined as a person’s willingness to accept the possibility of a loss in pursuit of a gain (as noted by Nobre and Grable in 2015). Understanding your risk tolerance and investing in harmony with it can prevent you from rash decisions, such as allowing emotion to dictate your investment choices.
A key component in investment decisions is time duration, or how long you expect to have the money invested versus when you will need it. Are you planning for a short-term investment, or are you saving for retirement? If your goal is to save for retirement, you’ll have a longer time horizon.
How comfortable would you be seeing a significant investment drop dramatically several times over a decade or two? And what is a “dramatic” drop to you?
Playing it too safe could be detrimental to your nest egg, as inflation can eat away dramatically at your purchasing power. But there are tradeoffs in taking on more risk in the hopes of getting a bigger reward, and taking on more risk doesn’t guarantee you’ll get rewarded for it. How do you find the right balance for your situation?
Attitudes towards risk can be scarred from living through events, such as a market crash. As Mary Ballin told Sarah O’Brien with CNBC:
“Just looking at how people handled the crash in 2008 is a big indicator of their risk tolerance... How did you react? Did you sell all your securities? Did you leave them alone? Or did you buy into the market and see it as a buying opportunity?”
“Maybe it’s that a client’s risk tolerance is they can swing from the chandelier and never take Pepto-Bismol,” Ballin said. “But then I can show them that to reach their goals, they don’t have to take on so much risk.”
So how risk adverse are you?
Let’s find out over lunch. RSVP today! Two dates, for two Bay Area locations:
For this Circle series, short risk tolerance questionnaires will be sent to registrants in advance of your meeting date.
Please complete your questionnaire before the day of your Circle; we’ll present you with a report of your findings and discuss your results over lunch.
Our discussion will include time for education, personal reflection, and sharing. At 1:30 pm, you’ll be back in your regularly scheduled day, having learned a few wise and actionable ideas about investment risk and how it applies to your personal comfort levels.