With the recent volatility in the stock markets, it is a good time for investors to review their risk tolerance. A formal risk assessment can provide valuable information that investors can use to form a baseline from which to make financial decisions, even amid market fluctuations and changes in life and work.¹ While no specific risk level is better than another, it is important to understand where you fall on the risk spectrum so you can apply that information toward your financial planning and investment strategies. Are you unsure of your risk tolerance? Asking for a formal risk assessment from your financial advisor is a great place to start.
Risk Tolerance most often refers to an individual’s willingness and ability to take risk. To identify willingness it is helpful to examine how an investor approaches investing: with extreme caution, with great flexibility and rigor to withstand market fluctuations – or somewhere in between? Willingness is largely a measure of how much risk someone wants or doesn’t want to take.
An investor’s ability to take risk is typically related to the level of financial assets and income used to support a spending requirement. Whether or not an investor’s financial assets and income are meeting their spending requirement, or providing a surplus or deficit to it, provides clues into their ability to take risk. Ability to take risk is the degree to which an investor can or needs to take risk in order to accomplish a particular financial goal.
We recommend that clients go through our formal risk assessment process to assess their willingness and ability to take risk. After 25 years of working with clients, we find that the best outcomes arise when an investor’s willingness and ability to take risk match. Aligning these two variables isn’t always easy, but through our investment and financial planning process, we typically find common ground that puts our clients on their personal path to financial success.
As another year comes to a close, please take the time to assess your willingness and ability to take risk in the pursuit of your financial goals. If you need assistance, please reach out to us.
1. Weber, Elke U.; Klement, Joachim, CFP, CFA. Research Foundation Briefs, “Risk Tolerance and Circumstances” March 2018, Volume 4, Issue 2. https://www.cfainstitute.org/en/research/foundation/2018/risk-tolerance-and-circumstances