What does risk tolerance mean?

What does risk tolerance mean?


Are you Bunny Slope or Black Diamond?

I have to be honest, whenever I meet with my financial planner and we get to the questions about risk tolerance, I suddenly become extremely uncertain: Am I a low risk person? Highly risk tolerant? Or somewhere in between?

Most of the time I seem like a low risk individual. I drive close to the speed limit, avoid bungy jumping, and stay inside during lightning storms. On the other hand, I’m a person who walked away from a secure corporate job in my mid-50s to become happily self-employed. Risk is a complicated topic. One person’s no-go is someone else’s idea of a howling good time.

Risk tolerance and your financial strategy

It’s important for your financial planner to understand your tolerance for financial risk so they can make recommendations for your investment strategy. They’ll want to understand how comfortable you are with uncertainty. You might get a thrill out of tracking the day-to-day movements of stocks, or you could be someone who freaks out when you see minus signs on your investment statement. If your portfolio doesn’t align with your risk tolerance, it will be more challenging for you to follow your financial plan on the journey toward your financial goals.

Risk tolerance is a very personal thing that’s shaped by experience, background, and plain old temperament. Think of it like a ski resort: Ski resorts have different types of terrain, all the way from the beginner bunny hill up to double black diamond. Skiers choose their runs based on a number of factors including their personal skill level and how much of a rush they’re looking for. When I was skiing in my 20s, it was no big deal to wipe out occasionally. Now I’d rather have a relaxed day in the crisp mountain air (followed by a hot toddy in the lodge).

Risk tolerance is an assessment of comfort level. One skier may have the skills to attempt a black diamond run, but they may not enjoy the added adrenaline. Other skiers are only satisfied in the backcountry where the risk is high but so is the thrill. The key is to hit the slopes with the right equipment and a good trail map, so you can maximize fun while minimizing danger.

Your risk is personal

I like to keep all this in mind when I meet with my financial planner. When the subject of risk tolerance comes up, I know there’s no “right” answer. They’ll ask a series of questions to try to zero in on my personal comfort level – this isn’t meant to put me in a box. What it does is guide investment strategies that will help me meet my goals without losing sleep.

I’ve also realized it’s important not to over-think questions of risk tolerance because it’s only a snapshot. My financial plan can – and should – be adjusted over time based on conversations with my financial planner and my changing goals and attitudes.

For some, risk can mean opportunity, excitement, or a shot at big gains. But since life is uncertain, you also need to know how you feel about the potential for losses. Your Arrivity® planner will help you determine your risk tolerance so your personal financial plan stays on the right road.

Questions for thinking about financial risk

  • What’s your reaction when you hear about a stock market decline?
  • Where do you keep your rainy day fund, and is it enough for you?
  • When you check in on your investments, do you feel like you should be making changes, or are you just tracking long-term progress?

Action steps

  • When assessing risk, make sure you’re talking about your entire financial portfolio. Sometimes safer investments can balance more risky ones.
  • If you’re not certain about the overall risk level of your investments, you can contact Arrivity Financial Planning for a plan update.
  • If you find yourself feeling unsettled in times of excess stock market volatility, contact your financial planner before making significant changes to your portfolio.

Please contact us at 206.217.2583 or info@arrivity.com if we can assist you or someone you know with financial planning.

Liz is a Late Boomer in the sandwich generation who started an independent writing and brand consulting practice after years as a senior marketing executive. She lives in Seattle, Washington. Her mother lives nearby and her daughter comes home during college breaks.

The foregoing content reflects the opinions of Liz Behlke and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.