Understanding Risk Tolerance

So let’s talk about something that could make or break your financial future, it’s risk tolerance. And I know before your eyes glaze over, it’s not financial jargon. It is the emotional and financial ability to withstand risk, market ups and downs. So if it affects what you invest in. It affects how volatile you want to be in the market or if you want to be in the market at all. You could want to invest in bonds or just be completely safe and not have any risk at all. So what’s the problem with this? Most people don’t fully know their risk tolerance. And this could be detrimental to their financial health. So today we’re going to break down our risk tolerance and how to find that, what’s important and how to find this by yourself and we could also help you as well. Risk tolerance is essentially how much loss you’re willing to take and withstand in your investments without getting emotional and making emotional decisions. There are three types of risk tolerance. Now that’s emotional, physical or financial and perception, perceived risk tolerance. So emotional risk tolerance is if there’s a big market dip, how are you going to react? Are you going to panic sale at the bottom or are you going to let it ride out until later? Financial risk would be how much risk can I actually withstand? Do I have savings enough to withstand this risk that I want to be aggressive or if I want to be moderately conservative. So that’s something that we need to talk about as well. Perceived risk is typically different from one and two. That is what you think you are. So let’s say that I think I can withstand losing 20% risk or losing 20% of my portfolio. But really when it comes down to it, I don’t want to lose that. Or I can withstand that type of risk. So here’s an example like how did you feel about the recent market downturn? Did you panic sale at the bottom? That’s a great indicator of emotional risk tolerance. I know that my fiance, when he was in his 20s, he was aggressive actually all the way up until now. And he’s 37. We just had that market downturn and he’s like, I don’t know if I want that much risk anymore. So that’s when you do that evaluation. Because risk tolerance is no just a one and done type of thing. It’s throughout your life. You need to make changes throughout life’s journey, let’s say. So your reaction is a strong indicator of that emotional risk tolerance. And if you like this and you want to hear more about stuff like this topic, please go to our YouTube channel and subscribe, like, even share. So why does risk tolerance even matter? Well let’s say that you’re driving down the highway and you’re going 35. It might be a little bit of an issue there, right? You might even get pulled over because you’re going too slow. But then what if you’re going too fast? You could get into a big crash and it could be horrible. So that’s why we need to know what we personally, personal, it’s a personal risk tolerance choice. It’s not what anyone else has. Too conservative, you might miss out on inflation, getting over that inflation hump and actually making some money. So your risk tolerance changes over time. Like I was saying, when my fiance was in his 20s, he was very aggressive. But now he wants to scale back a little bit. Again, when you’re in your 50s and you’re nearing that retirement stage, you’re not going to want to be as aggressive as that 20 year old stage. So that’s why you need a risk profile. And this is why it’s also important to have a Financial Advisor. We have plenty in the northern Michigan area. Give us a call. We will give you a free consultation and we can talk about risk tolerance and many other topics that I’m sure that you have and free for you to come in. So how do we actually figure out that risk tolerance? Well we look at past behavior. We assess that financial cushion that we might have. And we visualize those potential losses, if that might be. Like can I withstand a 20% loss this year? Financially or even emotionally. So remember, risk tolerance is not about being brave. It’s about being in alignment with who you are, your personality, even the amount that you’ve saved. All of those risk factors. And to wrap it up, understanding risk tolerance is one of the most important things that you can do for your financial health. So thanks for listening. If I helped clarify some things for you, please like, subscribe, go to our YouTube channel and share for more.