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?<\/p>\n
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\u2019m 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\u2019s no-go is someone else\u2019s idea of a howling good time.<\/p>\n
It\u2019s important for your financial planner to understand your tolerance for financial risk so they can make recommendations for your investment strategy. They\u2019ll 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\u2019t align with your risk tolerance, it will be more challenging for you to follow your financial plan on the journey toward your financial goals.<\/p>\n
Risk tolerance is a very personal thing that\u2019s 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\u2019re looking for. When I was skiing in my 20s, it was no big deal to wipe out occasionally. Now I\u2019d rather have a relaxed day in the crisp mountain air (followed by a hot toddy in the lodge).<\/p>\n
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.<\/p>\n
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\u2019s no \u201cright\u201d answer. They\u2019ll ask a series of questions to try to zero in on my personal comfort level \u2013 this isn\u2019t meant to put me in a box. What it does is guide investment strategies that will help me meet my goals without losing sleep.<\/p>\n
I\u2019ve also realized it\u2019s important not to over-think questions of risk tolerance because it\u2019s only a snapshot. My financial plan can \u2013 and should \u2013 be adjusted over time based on conversations with my financial planner and my changing goals and attitudes.<\/p>\n
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\u00ae planner will help you determine your risk tolerance so your personal financial plan stays on the right road.<\/p>\n