Risk – Figuring out the right one for you!

Every investor knows that risk and return go together but when it comes to risk tolerance, everyone is different.  How much you can endure depends on several factors.

Risk tolerance is subjective and varies from person to person.  For some people seeing their investment go down a few thousand dollars is no big deal and for others a decline of a hundred dollars will cause sleepless nights.  Risk is both financial and emotional.  Financially, it’s about attaining the returns you need in order to achieve your financial plan and emotionally, it’s about choosing investments that don’t stress you out and contribute to insomnia.

So how do you figure risk out and choose investments that match your risk profile?

Start with your goals – You need to know what you are trying to achieve.  Once you have your financial plan completed you will have a better idea of the rate of return required for it to be successful.  If you only require a 3% rate or return to meet your goals, why expose yourself to more risk by chasing higher returns?

Understand the real market risk – We all feel “riskier” when the markets are doing well – but during market volatility you might just realize you’re not as risky as you thought.

Define your time horizon – Over the long term markets rise – if you don’t plan on touching your investments for many years you can probably afford to be a little riskier with them, however, short term money or emergency funds might not be suited to high risk options.

Be aware of what you can lose – try not to think in percentages.  If you invest $25,000, think about your possible loss as $2,500 rather than 10%.  It tends to make it more real.

It’s not all doom and gloom – there are ways to maximise the potential for higher returns and manage risk at the same time.  By establishing your expectations and managing your risk tolerance from day one, you won’t panic with the inevitable market volatility.

Your Certified Financial Planner will have a questionnaire to help you determine the correct risk tolerance and asset mix for your individual situation.  Talk to them about your plan and understanding your risk tolerance.

This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments.  

Please contact your own advisor for specific advice about your situation.