Would you consider yourself a risk-taker or do you prefer to play it safe? Maybe you are somewhere in the middle and prefer research and guidance around things that are new or consequential. The great news is that a financial advisor in Flagstaff can help measure your tolerance for risk and use that information to tailor an investment strategy to your specific goals.
Your risk tolerance can change for a variety of reasons. An investor with an aggressive risk tolerance is willing to risk more money for the possibility of better returns. A conservative investor will have a lower tolerance and a goal of low volatility.
It pays to understand why wealth management without retirement planning could be a huge mistake.
This article covers what you need to know about how your risk tolerance changes over time, such as:
- When risk tolerance changes
- How income, time horizon, age, life circumstances, and experience level affects risk tolerance
- Diversification to manage risk
- When to reassess your risk tolerance
Your risk tolerance may change at any time.
Your risk tolerance can shift. From job transitions to marriage and kids, the life events that affect your risk tolerance are as varied and unpredictable as you are.
Here are a few examples of life changes that might adjust tolerance:
- Getting promoted: An increase in salary might allow you to increase investment amounts and risk.
- Getting married: A new partner may bring more income or debt and a change in investment philosophy.
- Having children: Becoming a parent may change the way that you feel about finances and change your spending patterns.
Your income may affect your risk tolerance.
You might think that your income has little to do with your risk tolerance, but it plays a large role. People who have high net worth usually have more disposable income and can afford to take on more risk.
How your time horizon affects your risk score.
If you have a longer time horizon, you can afford to take on more risk. In fact, a study from Morningstar showed that the average investor with a long-term investment horizon has more than twice as much exposure to equities as someone who has a short-term investment horizon.
Why? Longer periods allow for greater gains and greater volatility over time. The longer your time horizon is, the more volatility you can take on in exchange for the potential of higher returns.
If you’re considering adjusting your portfolio because of an upcoming event like retirement or college funding (or simply because you’ve changed jobs), make sure to revisit how much risk is right for you at that point in time, and what kind of return potential justifies it.
Your age will affect your risk tolerance.
When you’re young, you have time to recover from market downturns and years of employment to make money to invest in the future. However, as you get older, market volatility has a greater impact on your portfolio. As we age and get closer to retirement, we may need an investment strategy that will be less volatile and more conservative.
Even if a person has always had a high-risk tolerance level, they may need to adjust their tolerance level as they age.
Life milestones can be a trigger for adjusting your risk tolerance.
- Relationship status change
- Adding to the family: If you decide to start a family, that could change how risky your investments are, as you may want to put money aside for their education and other needs.
- Retirement: This is probably one of the most common times when people shift their investment style from aggressive to more conservative since they have less time before retirement (and thus less opportunity to recover from any financial losses). Read: What is a Risk Assessment and Do I Need One for Retirement?
- Death of a loved one: A process called “grief-related selling” often happens after the passing of someone close, which may lead people to make major changes in their portfolios for emotional reasons alone.
When your life circumstances change, so will your risk tolerance.
If you are retired your risk tolerance may decrease because you need your retirement savings to be stable If you are still working, then your risk tolerance might be higher because there is time for your investments to recover.
Your experience level can affect your risk tolerance.
As with the other factors that affect your risk tolerance, your experience level plays a crucial role in determining how much risk is appropriate for you. The more experience you have, the more comfortable and confident you are as an investor.
Conversely, if you’re new to investing, then it’s natural that your knowledge may be limited and lead to a lower risk tolerance than someone who has been investing for years.
Diversify your portfolio to meet your risk.
Diversification is a good strategy to reduce risk in your portfolio. Diversification attempts to reduce risk by allocating investments across various financial instruments, industries, and other categories. The goal is to minimize losses by investing in different areas that would react differently to the same event.
You should reassess your risk tolerance regularly to determine whether it has changed.
You can do this by answering the following questions:
- Have I experienced a life event that may have affected my ability or willingness to take risks? (For example, becoming a parent, losing a job, graduating from college.)
- Have I had any financial events? (For example, buying a home.)
- Are you uncomfortable or frightened by recent market events?
If you answer “yes” to any of these questions then you should discuss your risk tolerance with your financial professional.
GET YOUR FREE RISK ASSESSMENT HERE!
Wealth management with retirement planning: Comprehensive planning is more than investing.
If you’re thinking about how to invest your money, it’s important to consider all of the factors that impact your risk tolerance. While investing is important, it’s not the only part of a good retirement plan.
When planning for retirement, make sure that you’re preparing yourself for the future. That means having a plan in place and knowing what changes might affect your financial situation later on down the road; then taking those into consideration when making decisions about investments.
To get started on building your retirement plan, think about these questions:
- What’s my current financial situation? You may have some debts or savings goals that could impact how much risk you can afford at this time.
- What are my long-term goals? Do I want to travel around the world after working for 40 years? Or do I want to retire early and spend more time with family? These answers could change how much risk feels comfortable for you now since they’ll affect how much money will be needed in future years.
- Read: How Will Inflation Affect My Retirement?
You deserve the peace of mind provided by Ascendant Financial Solutions.
You should not wait until you are the same age as the average retiree to start thinking about retirement. The sooner you begin planning for your future the better off you will be come retirement time, and the deeper you can sleep at night.
At Ascendant Financial Solutions, Inc., we believe it is our job to take complex financial situations and make them simple for you to understand in order to:
- Best prepare for the future
- Reach your big goals
- Make the best financial decisions for your business
- Putting your values and aspirations first
Download our complimentary eBook and contact our team for an introductory call today. You deserve the best in wealth management for long-term financial support.