What Is Your Appetite for Risk in Life and Investing?
I have twin daughters who love rollercoasters, which means I ride a lot of rollercoasters. It’s a measure of how much I love my daughters because rollercoasters are not my favorite thing. The sight of that single, skimpy-looking track rising 150 feet in the air is pretty scary. Statistically, I know I’m safer riding the rollercoaster than I am driving my car to the amusement park, but that’s beside the point. When it comes to taking risks, our emotions tend to overrule the facts.
Investments Involve Risk
When it comes to investing, my rollercoaster experience makes me more empathetic towards my clients’ attitudes about risk. Investments necessarily involve a certain element of risk that can lead to losses, and people respond differently to that risk. An aggressive investor generally has a higher risk tolerance and is comfortable risking more money for the possibility of better, albeit unknown, returns. A conservative investor has a lower risk tolerance and seeks investments with more reliable returns.
Risk Profile Influences Strategy
In putting together a financial plan, I work with clients to establish their risk profile. This information plays a central role in shaping their investment strategy and allows me to find the most suitable investments for each client to consider.
An individual’s risk tolerance is influenced by a variety of factors, including financial goals, personal circumstances, and their emotional disposition. Getting at the emotions behind our attitude towards risk can be especially challenging. Sometimes we don’t know our own feelings until we find ourselves in a real-life situation.
To get a handle on a client’s true attitude, I walk them through a structured assessment that includes a questionnaire designed to clarify and quantify their appetite for risk. Experience has also taught me that listening closely to what clients say and how they say it, can provide clues about what level of risk is okay, and how much is too much.
Risk Assessment Depends on the Goal
A goal many people have in common is to not outlive their resources – if they make it to 100, they want to be sure they still have money. But retirement may be one of several investment goals, each with a different time frame, and a different risk assessment. If a client is planning to buy a house in six months, the risk strategy for the earmarked funds would be different than if they plan to buy a vacation home in a few years. For each goal we devise a specific investment strategy and risk balance.
Managing Risk Over Time
Managing risk is an ongoing process that requires rebalancing a client’s portfolio to be sure we maintain the desired risk exposure. It also might involve providing guidance if a client’s impulses could be detrimental to their investment strategy. That might mean encouraging an aggressive investor to moderate their choices as they approach retirement, when they are more vulnerable to big draw downs on their funds as a result of swings in the market.
Our firm’s overall investment strategy is risk adjusted, which is evident when the inevitable happens and the market experiences a downturn. At those times, we work aggressively to manage all of our clients assets, so they have the potential to recover more quickly when the market swings back up.
Despite the risks, investing in the market has proven to be a highly effective strategy for building wealth. Historically, this has been true even if you think you’re getting in at a high point.
If you have questions about your risk tolerance contact our team at Marshall Financial Group. We have a broad range of options for matching your risk appetite to an investment strategy that will help move you towards your financial goals.