What is Risk Tolerance?

When you meet with a financial advisor, at some point the talk will turn to your “risk tolerance” or “risk profile” … and you may receive a questionnaire intended to help gauge it. Well, it seems simple enough: the financial advisor is learning how conservatively or aggressively you would like to invest. But actually, a risk profile signifies more than that.

Financial advisors often use a few model portfolios which they adapt for the unique needs of each client. Your risk profile indicates which of these model portfolios might become a good basis for your own, custom portfolio.

Investors are usually categorized as “conservative”, “moderate” or “aggressive”, with in-between categories of “moderately aggressive” and “moderately conservative” also applicable based on questionnaire responses.

How aggressive or conservative are you? If you absolutely do not want to risk losing money, and if your first priority is consistent income to live on, you are probably a conservative investor. If these are your concerns and you are retired or about to retire, you shouldn’t be investing in high-risk investments. Aggressive and moderately aggressive investors commonly want to match or beat the stock markets, or still have at least 10 or more years to save for retirement.

Why is risk tolerance so important? Well, decades ago you used to hear “horror stories” about seniors losing their life savings as a result of inappropriate investments. Things have changed for the better and we now have questionnaires and in-depth discussions about risk tolerance. It is a very important factor not only in terms of investing, but in terms of the client-advisor relationship.

If you’d like to find out what kind of investment style you have or you feel like you may be taking on too much risk, feel free to contact us and we'll help you figure it out.

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