A risk profile is used to help you select an appropriate investment mix to best meet your unique needs while also staying in your individual comfort zone. Risk is the chance that the value on your investments will go up and down. We consider a steady eddy investment is less risky. A high flier with large up and down swings, more risky. You may make smart investments that are risky in the hope your investments will grow and provide money for your future.
As a financial planner is help plan, save, and invest for your needs and dreams. A key step is to help you identify your willingness and ability to take on risk in your investment portfolio. If you express a strong desire not to see the value of your account decline and are willing to give up potential investment growth to smooth things out, we say you have a low willingness to take on risk or are risk-averse.
If an you have a desire for the highest possible growth on your investments and are willing to endure large swings in the value of your account to achieve it, you have a high willingness to take on risk and are a risk seeker. I usually talk with my clients about their relationship with money and use a questionnaire that asks questions. The worst time to find out that you don’t really like to take a lot of risk is after your investment drops by half overnight. You can’t sleep, you can’t think, your terrified you’ll lose the rest, and you bail out at the bottom, locking in those huge losses.
What’s your ability to take on risk? If you saved well in a retirement account or TSP, have a solid emergency fund and insurance coverage, and a dependable job or a government pension you have a higher ability to take on risk. If your investments take a temporary dive, you have other assets to tap if you need to. Also, the more time you have, the more ability you have to take on risk. Most investment portfolio losses are temporary, if you leave them be. This is why younger people with low debt and solid savings often have a higher risk ability. And if they also have a matching comfort with taking risk, an investment portfolio heavy in more volatile stocks that offer higher reward may be a great fit.
The opposite may be a 80 year old retiree living on Social Security and taking withdrawals from very modest savings. They may not be able to work more if they have unexpected expenses or cost of living increases, so they have to live on what they have. They probably won’t have the ability or time to recover from a huge drop on the value of their investment portfolio. This person would have a low risk ability, even if they are willing to take on risk.
As an advisor, I generally recommend investing based on the lowest risk, either your willingness to take on risk or your ability. What if you want or need higher investment growth? If the challenge is your ability to take risk, shoring up your safety net is the first step. An emergency fund, insurance, and the flexibility to tighten your belt if need be will increase your ability to take on more risk, and in the long haul enjoy higher investment rewards.
What if your risk tolerance, or comfort taking risks with your investments is low? Focus on smoothing your investment returns with diversification and investments that are lower risk, lower reward like more bonds may be a good move. But you’ll need to take a realistic look at whether this investment growth will provide for your future needs and wants.
A good financial planner, like me, is a great way to explore your risk profile, see how it matches up with your needs and dreams, and help you save and invest to reach your best future. If you prefer to go it alone, most investment platforms offer online tools to help you identify your willingness to take investment risk. If you have any questions, or want help with your special needs and dreams reach out. I live to help.
