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Understanding Your Risk Tolerance and Your Risk Capacity

Understanding Your Risk Tolerance and Your Risk Capacity

Taking the right amount of risk in your investments is crucial to achieving your financial goals.

Many are familiar with risk tolerance – the measure of volatility in investment returns an investor is willing to withstand. Knowing your risk tolerance reveals what percentage of your assets should be broken up among the sliding scale from riskiest to least riskiest investments.

Historically speaking, riskier assets produce higher returns albeit more volatility. Understanding what you can stomach is the second step when selecting your portfolio’s allocation.

So…what’s the first step?

The first step is knowing how much risk you can actually afford to take

This is called your risk capacity. It is the measure of how much risk an investor can take without it having an adverse effect on his or her goals.

Putting money at risk above your short-term needs can cause lower returns due to market timing. If you need to sell stocks repeatedly to fund your spending, you may eventually be selling in a downturn or a bottom.

Stocks are long-term investments and should be utilized with money for the long term (i.e. retirement, college savings, savings above short-term future spending needs).

Do you know if your investments align with your risk capacity and risk tolerance?

Having a financial plan in place will show cash flow timing to establish the optimal amount of money you can afford to put at risk to achieve future aspirations.

I recommend working with your financial advisor to determine where to take the risk, how much risk to take, and when to move to a more conservative portfolio to meet your goals due to the complex implications it may have on your taxes and estate.

SVA Financial Group provides comprehensive financial planning services for every life stage. Contact us today to see how we can assist you.

 

©2020 SVA Financial Group

 

All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principal. For information on how these general principles apply to your situation, consult an investment professional.

Article Topic Specialist: Brian Klein

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