Risk tolerance plays an important role in your portfolio. However, you might not have a proper understanding of it. Find out what it should mean to you.
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The Bass Lines:
What Is Risk Tolerance?
- [1:16] – Risk tolerance is the amount of volatility you can comfortably withstand in your investment accounts. For example, if you saw your accounts cut in half in 2008 and shrugged your shoulders, you probably have a pretty high risk tolerance. If you lost several nights of sleep, you, along with many other Americans, have a different level of risk tolerance.
What’s The Problem With Risk Tolerance?
- [2:02] – Any time someone asks you about your level of risk tolerance, there’s a good chance it’s not a planning question. Rather, it’s a sales question. After all, if they can say they’ve put together a plan that meets your expectations, you’re more likely to work with that advisor. Furthermore, what if your supposed level of tolerance is illogical? If you say you’re a conservative investor, but you’re not going to be retiring soon, it doesn’t make a lot of sense for you to invest conservatively. If you don’t need the money in the market now, you can afford to take a little more risk. Conversely, if you’re going to be retiring in the next few years, it doesn’t matter how aggressive an investor you are. You should be taking risk out of your portfolio. Therefore, your advisor shouldn’t build a plan that merely reflects your level of risk tolerance. He or she should be examining your situation and helping you to determine a level of tolerance that’s appropriate for you.
When Do Your Opinions On Risk Matter?
- [5:28] – If we can help you to achieve your goals with any amount of risk in your portfolio, we’ll adjust accordingly to your level of risk tolerance. However, if you need a certain level of risk to help you achieve your goals, we’re going to employ that amount of risk in your portfolio. In the same way you can’t always trust your emotions, you can’t always let them dictate how you invest. You need a plan that’s going to help you achieve your goals in an efficient manner.
Risk tolerance is important, but your risk tolerance should be based on an understanding of the bigger picture. - John Stillman, Mr. Stillman's OpusTweet This