Understanding Risk

What is risk tolerance? Simply put, it quantifies your willingness to accept risk.

Each investor has their own level of risk tolerance. It’s not necessarily measurable, and it varies based on your personal preferences and your financial goals.

Retirement is a major goal. You need to know how much you need to save and when you’ll need to access your money.

What’s Your Risk Tolerance?

If you’re more comfortable with risk, you’ll be less likely to avoid it when making investment decisions. But if you have a low risk tolerance, you may make more conservative choices yielding lower returns.

Life events including getting married, having children, or major health issues can also impact your risk tolerance.

As you’re considering your tolerance level, here are some questions to think about:

• How do you feel about making financial decisions?

• Are you open to higher risk for greater returns?

• Does market volatility make you feel stressed or anxious?

• How much do you understand about various investment options and their risks?

• Do you have the discipline to stick to your investment strategy—even with a market downturn?

• What’s your investment timeframe? (Short? Medium? Long-term?)

Determining your risk tolerance helps you gauge your capacity to handle uncertainty and volatility in investments. You don’t want to be up at night worrying over market uncertainties or whether you can afford to comfortably retire.

Your age is also an important factor when considering investments. As you get closer to retirement, you should focus on reducing riskier investments and increasing allocations to less volatile assets.

History shows that bear markets, which are periods when stocks go down in value, occur regularly. And we can’t predict when the next market downturn will happen. Instead, prepare for a bear market the same way you prepare for a bull market, a period when stocks go up in value—by identifying the level of risk that’s right for you—and don’t try and outguess the market.

Focus on Your Goals

Even during challenging times, like the 2020 pandemic, markets remained resilient—eventually rebounding. When investing for retirement, invest for the long term, remain focused on your goals, and work with your Advisor to help ensure your decisions align with your goals.

Your Financial Advisor can help guide you through choosing the right investment options, which may include different types of asset classes, stocks from a variety of sectors, bonds, and other fixed-income securities.

They can also help you strategize your investment decisions to align with your risk tolerance, helping you weigh costs against what you can tolerate and afford.

For example, if you have a low risk tolerance, your Advisor likely won’t recommend an 80/20 portfolio, which allocates 80% of your investments to stocks and 20% to fixed income. With this allocation, while there is a possibility of earning higher returns, you have more money allocated to stocks, so your risk factor increases.

Similarly, with a 100/0 allocation, also known as an all-stock portfolio, you’re investing all of your investable assets into stocks.

The strategy here is that, over time, stocks yield higher returns than bonds and cash. So, investing your entire portfolio in equities may maximize your gains. The problem is that stocks are more vulnerable to ups and downs in the market than other assets. This could be a riskier strategy for those trying to reach their goals.

As always, we recommend working with a Financial Advisor who can help you determine your risk tolerance.

This material is for educational purposes and intended use is for financial professionals. Symmetry Partners, LLC (“Symmetry”) provides this communication as a matter of general information. Information contained herein, including data or statistics quoted, is from sources believed to be reliable but cannot be guaranteed or warranted. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. All content is for educational purposes and should not be considered investment advice, recommendation, or offer of any security for sale. 

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Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Please check with your firm’s Compliance and/or OSJ for usage requirements.