Understanding Risk Tolerance: Why It Matters in Investing

Most people focus on one question when it comes to investing:

What kind of returns can I expect?

But the more important question to tackle is:

How much risk are you comfortable taking to get there?

What is Risk Tolerance?

Risk tolerance is your ability and emotional willingness to handle the ups and downs in your investment portfolio. It measures how much loss you can stomach before you feel compelled to get out of the markets. The higher the risk, the greater the potential reward, but also the greater the potential loss. Your risk tolerance provides insight into your psychological comfort with volatility as well as your financial capacity to withstand losses, ultimately shaping your investment profile.

Basic Types of Risk Tolerance:

• Conservative – Prioritize stability over high returns

• Moderate – Seek balance between risk and return

• Aggressive – Prioritize maximizing returns and focus on long-term growth, willing to accept substantial risks

Factors That Influence Risk Tolerance:

• Age and Investment Horizon - The longer your investment horizon or the younger you are, the more time you have to recover from potential losses, which increases your ability to take on more risk.

• Income and Net Worth - Individuals with higher incomes often have more resources available to withstand potential losses.

• Life/Financial Goals - Long-term goals can allow for more risk than short-term goals.

• Personality and Emotions about Money - Encapsulates your personal feelings that come with market fluctuations.

Why It Matters:

• Helps avoid panic selling - If your portfolio is too aggressive for your personality, you might panic-sell at a bad time. Understanding your risk tolerance can help you stick to your plan and feel good throughout the ups and downs of the business cycle.

• Keeps your goals realistic - If you aren’t able to stomach more significant losses when the market is down, it’s important to adjust your expectations for substantial growth, since your risk tolerance is less aggressive.

• Aligns goals with investment strategy - By aligning your investments with your risk level, you can stay on track to achieve financial goals and feel more confident during market fluctuations.

Knowing your risk tolerance can change how you feel about investing - Let’s find outwhere you stand.

Contact us today at 708-665-6663 or advisors@4wealthfg.com.

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