E very investor knows that risk and return go together. When it comes to risk tolerance, though, everyone’s different and how much you can endure on the downside depends on several factors, including years to retirement, lifestyle and more.
Sandra Sigurdson, Investors Group Director of Strategic Investment Planning, says, “Risk tolerance is subjective. For some investors, losing a few thousand dollars is no big deal. For others dropping even a couple of hundred dollars is a big deal.”
Risk tolerance is also both financial and emotional. “For financial, it’s about needing to make the investments that meet the objectives of a long-term financial plan,” she says. “For emotional it’s about making investments that don’t stress you out and negatively affect other aspects of your life.”
Here are five things to consider when determining your risk tolerance.
1 // DO YOU UNDERSTAND THE MARKET?
“If Alpha and Beta are all Greek to you, consider wading in slowly, until you grow your confidence and understanding,” says Sigurdson.
2 // HAVE YOU EXPERIENCED LOSSES?
If you’ve been through a downturn before, think about how it made you feel. “Did it cause you to pull back on your investments and perhaps sit on the sidelines or move into “safer” investments? Did it cause you emotional turmoil or were you able to stick to your plan, participate in the recovery and get on with your financial life?” asks Sigurdson. “Answering those questions will give you a good read on your risk tolerance.”
3 // ARE YOU AFRAID OF UNCERTAINTY?
“Your tolerance for uncertainty in your work life and the people you choose as friends are good indicators of your tolerance for uncertainty in the value of your investments,” she says.
4 // DO YOU HAVE OTHER MONEY ELSEWHERE?
If you have other sources of income, like a pension or maybe a sprawling estate you can one day sell, then you may be able to take on more risk in your portfolio.
5 // ARE YOU AWARE OF WHAT YOU CAN LOSE?
Research has found that if you put potential losses in percentage terms, you won’t really be able to evaluate how much of decline you can stomach. Put it in dollar terms instead. “Instead of a 30% drop, tell yourself that it’s a $30,000 drop,” she says. “How would that feel? What would you do?” Your professional advisor can help you build a portfolio with the right level of risk and the right risk management strategies for you.
BY JEFF FINCH, CERTIFIED FINANCIAL PLANNER
416 695 8600
Jeff Finch, CFP is a Regional Director for Investors Group Financial Services