Setting up your investment strategy takes careful planning. It means defining your investment goals, deciding how long you plan to invest your funds before you’ll need to tap into them, determining how big of a portfolio you have to work with—and it means understanding how well you handle risk, from both a financial standpoint and your state of mind.
Riskier investments may often have higher returns, but that also means you stand to lose more when the economy starts to fall.
How you felt when that dip happened is a sign of your risk tolerance.
Risk tolerance refers to how well you can handle losses when your investments perform poorly (like when the novel coronavirus pandemic sent stocks diving). Risk tolerance is usually influenced by your goals, length of investment, age and stage of life, portfolio size and your personal stance on risk (some people are comfortable with taking risks while that same risk makes others lose sleep), and diversification is key to managing market volatility.
Risk tolerance works on a spectrum that ranges from very defensive to very aggressive, with conservative and moderate somewhere in between. A very defensive investor is extremely risk‐averse, while a very aggressive investor embraces the greatest risk in hopes of a potentially very high return. Most people fall somewhere in the middle.
When evaluating your risk tolerance, it’s important to take an honest assessment of your mindset. In times of decline, is your instinct to move investments from higher‐risk assets to more conservative choices? Or do you respond more like a bargain hunter, looking for cheaper deals in hopes that values will rise? It can be helpful to convert market losses from percentages to actual portfolio dollars to get a more concrete understanding of your response to potential market fluctuations.
It’s all about allocation, allocation, allocation.
Let’s use a well‐known organization, like the YMCA, as our example. When you think of the Y, you may think of exercise equipment in the weight room or fitness classes, but that’s just one part of their revenue stream. They also offer full‐time childcare, swimming lessons (for kids and adults!), after‐school care, programs for youth and adults with disabilities, programs for retirees, nutrition services and more. As you can see, their offerings extend far beyond the weight room walls, giving them a variety of income streams and reducing their risk of losing money in any given year.
Asset allocation works similarly, meaning you manage your risk by dividing assets into different classes. Different classes, such as stocks, bonds and cash alternatives, like money market accounts, have different risk profiles and potential returns. More conservative choices involve a lower risk of loss and lower expected returns, and more aggressive options may have the potential to earn far more—and, subject to market volatility, they can also present a higher risk of loss. The right individual mix of higher‐ and lower‐risk assets for you depends on a combination of your goals, time to invest and risk tolerance.
It’s crucial to reassess investments around important life events like employment changes, family additions, marriage or divorce, illness or serious injury. Events like these can change your goals, impact
your investment time horizon and shift your risk tolerance. Just as you wouldn’t want to ignore major changes in your physical health, it’s important to pay attention to life’s changes, to make sure you’re doing all you can to take care of your financial health. You might think of it as a financial wellness checkup.
Verve’s team is here to help you figure it out.
There’s a lot to consider when assessing your own risk tolerance for investing. And sure, we’ve got resources to help you explore and understand investment strategies, concepts and important terms. But even better, our wealth management team brings experience and perspective to help you make investment decisions that best reflect your goals, timeframe and risk tolerance.
Our wealth advisors can help you better understand fundamental principles and strategies for investing, and they can help you clearly understand risks associated with different assets—so you can be confident that your investment strategy truly reflects your risk tolerance. And, when life events change your goals, timeframe or tolerance for risk, they can help you make well‐informed decisions to rebalance your investment portfolio, preserve your financial health and promote a balanced lifestyle.
Verve’s wealth management team has years of experience helping people just like you make sound investment decisions. Got a question, or need help evaluating your investment portfolio? Get in touch with a wealth advisor who can guide you through a financial checkup, answer your questions and help you create an investment approach that works for your unique situation.