What type of investor are you? Aggressive and risk tolerant? Conservative and risk averse? Or somewhere in the middle? Your ability to tolerate risk influences the investment choices you make — and, ultimately, may have an impact on your success at reaching your financial goals.
Risk Tolerance Isn’t Static
Ongoing market volatility can affect an investor’s risk tolerance. During an extended period of extreme market fluctuations, investors who previously had a high capacity for risk may find their comfort levels dropping. Similarly, prolonged market upswings may encourage previously conservative investors to invest more heavily in the market. As a result, they take on additional investment risk.
Capacity Is Another Component
Your ability to accept risk also depends on financial and other considerations, such as your time horizon for tapping your assets. Consider how much money you could afford to lose if investment values dropped appreciably. If investment losses would undermine your financial security, and you have a short time frame until you’ll need your funds, your capacity to take risk may be limited.
Perform a Reality Check
A long stretch of either strong or weak market performance can convince investors that the current trend will continue indefinitely. Perceived risk — how much risk you think an investment holds — is a subjective gauge. Thus, your perception of an investment’s risk might not be in sync with its actual risk. Because your risk tolerance may change over time, consider revisiting the subject periodically — ideally during your annual investment performance review.
Your financial professional can help you reassess your risk tolerance and the level of risk in your portfolio.