Let’s talk about something that doesn’t get the recognition it deserves—risk tolerance. This is a crucial part of developing a financial plan that works for you and helps you achieve your longer term goals. The word ‘risk’ is a simple way of stating how much short-term volatility you are willing to accept and what your desired rate of return is.
We’ve all been there—stocks are rising, the market is bullish, and we feel like invincible financial wizards. But let’s be honest; anyone can have a high-risk tolerance during these times. The true test comes when the market is falling. So, how do you determine your risk tolerance? Let’s break it down.
Don’t worry, it’s just like taking a personality test. You answer a few questions which will determine your risk appetite, capacity, and profile. These questions are usually a combination of “check the box” style and open ended. This helps build a plan tailored to your individual needs and goals. There are a lot of financial plans out there, each claiming to be the best one. But, at the end of the day, the best plan is the one you can follow. What good is a financial plan if you can’t stick to it? It’s like buying a gym membership but never actually going to the gym.
So, let’s talk about why having a plan you can actually stick to is so important. I could bore you with statistics and charts, but instead, I want to take you on a little trip down memory lane. Remember the Great Recession of 2008? It was a dark time for many, and the impact was felt far and wide. But do you know who weathered the storm better than most? Those who were financially prepared.
Navigating Economic Turmoil
During times of economic turmoil, having a plan in place can be the difference between sinking or swimming. And it’s not just about having money in the bank. It’s about navigating the present without sacrificing your long-term financial goals. You might be thinking, “But I have a high-risk tolerance! I can handle anything the market throws my way!” But have you truly assessed your risk tolerance?
It’s easy to feel invincible when the market is soaring. But, the actual test of your risk tolerance comes when the market takes a dip. So, take a moment to think about your financial plan. Are you truly prepared for the worst-case scenario? Do you have a plan to weather the storm without sacrificing your long-term goals? How have you actually behaved and felt in uncertain and volatile times?
To help you answer those questions, here are a few things to consider.
How We Determine Your Risk Tolerance
First and foremost, you need to evaluate your current financial situation. Take a deep dive into your income, expenses, debt, and savings. This will generate a better understanding of your overall financial stability and help you determine how much risk you’re comfortable taking on.
Next, think about your financial goals. What do you want to achieve in the short and long term? How would those goals be impacted in best and worst case scenarios? Are you willing to take on more risk to achieve your goals, or are you more comfortable with a conservative approach?
Your timeline is also a factor to consider. If you have a longer timeline for achieving your goals, you may be able to take on more risk than someone with a shorter timeline.
Let’s not forget about emotions. Your emotional response to market fluctuations can impact your risk tolerance. Can you handle the market’s ups and downs, or do you get nervous and anxious? Knowing your emotional response can help you develop a financial plan you’re comfortable sticking with.
And last but certainly not least, feel free to consult with a financial advisor. They can help you evaluate your risk tolerance and develop a financial plan that aligns with your goals and comfort level.
You might not realize it, but risk tolerance is one of the biggest factors that influences your investment success. By taking the time to evaluate your financial situation, goals, timeline, emotions, and seeking guidance from a financial advisor, you’ll be better equipped to weather the ups and downs of the market and achieve your long-term financial goals. Also, remember your risk tolerance can change over time, so it’s essential to reassess your financial plan periodically.
Helping You Succeed
At Uncommon Cents Investing, the best part of our work is helping people achieve their big goals while feeling financially secure. Let’s chat if you need help looking at your overall financial health and coming up with a comprehensive plan for all your life’s needs. Schedule an introductory call with one of our financial advisors today.