If you’re new to investing, risk tolerance is something we help clients gauge when we discuss time horizon and goals. Risks mean opportunity but risk tolerance will affect investment strategy. Without understanding the level of risk a client is willing to take, their financial capacity to bear that risk, the need for the income, and when they’d like to access their money, an investment manager would be unable to effectively advise them to a sound investment strategy.
While an individual can have a high appetite for risk taking and the capacity to take risks, they may not be financial able to tolerate risks if they own a business, have a mortgage, and two kids in college. Not to mention, they need to consider the unexpected expenses that may occur in a typical month like injuries and medical bills, or job loss. Goals and time horizon can also affect risk tolerance.
Saving for a down payment on a house would be considered a goal with a short-term time horizon and would require aggressive investment strategy while saving for retirement would be a long-term time horizon and require a balanced portfolio with low, medium, and high-risk investments. If a person’s goal is to retire at 60 and they’re 45, their portfolio may require more investments in stocks and less in bonds and cash even if the individual wanted to play it safe with their investment portfolio.
The bottom line is that investing is extremely personal and no two investment portfolios will be alike. If you have questions, contact one of our Alloy Investment Management experts to schedule a consultation. 800-689-3935