Having The Risk Tolerance Discussion

Driving in the fast lane can be exhilarating with the wind blowing in your
hair and the scenery passing by in a blur. It requires extra attention if you
are the driver, and your reaction time must be on point if you want to avoid obstacles. You might prefer to hang out in the middle lanes, it’s a little less stressful and allows you to have an in-depth conversation or change a song on your playlist. The journey is just as important as the destination, and you intend to enjoy the ride with a little less hyper-awareness. And then there are the slow lanes. This lane is where your 16-year-old might feel the safest when driving the freeway for the first time. Maybe you are cruising in your vintage BMW that struggles to sustain the 78MPH that everyone drives in the left lanes. It could be that you are in no hurry to arrive at your destination, and you want to keep the stress levels of driving at bay.

What lane you chose to drive on the freeway is a great display of how you may choose to invest your money. Whether you are in a rush or want to keep it slow and steady - this is your risk tolerance and it is one of the most important things to know about yourself when figuring out what type of investor you are.

There are various ways to figure out your appetite for risk when it comes to your money. There are surveys you can take on your own and
questionnaires to fill out when meeting with a new advisor. Our previous
blogs go into detail about finding your level.

As an investor, you should look for an advisor who makes this their first move - getting to know you, learning what your goals are, and help you figure out where you are most comfortable when it comes to risk.

Investors are usually classified into three categories when looking at risk:

1. Aggressive Risk Tolerance - These investors are looking for maximum results and are willing to risk losing money along the way. They have an understanding of volatility and seek strategies for achieving higher-than-average returns. These investors value capital growth over preservation and may have a longer time horizon.
2. Moderate Risk Tolerance - Often known as a balanced approach and
   usually feel best in a 50/50 or 60/40 type of structure. These investors are weighing opportunities and risks and want to grow their money without losing too much. This level may become less effective as markets become more volatile.
3. Conservative Risk Tolerance - Retirees or those close to retiring are
   often in this category as they have a short-term investment strategy
   and are unwilling to risk a loss to their principal investment. These
   investors are looking for highly liquid and guaranteed vehicles such as CDs, money markets, or treasuries for preservation and income.

Knowing your lane and staying within it sounds simple but there are deeper factors that go beyond your propensity for risk to consider. Informed investment decisions are also based on time, tolerance, and capacity.

Time Horizon

Having financial goals with a longer time horizon to reach them may push
an investor towards higher-risk assets as there will be more time to recover from a loss. If the goals are more short-term, a lower-risk cash investment may be more appropriate.

Future Earning Capacity

Retirement might be looming or there may be other assets such as a home, pension, social security, or an inheritance to consider. These all affect risk tolerance. “An investor can take greater risk with investable assets when they have other, more stable sources of funds available.

Additionally, investors with a larger portfolio may be more tolerant to risk, as the percentage of loss is much less in a larger portfolio when compared to a smaller one.” Investopedia

Lastly, there are market conditions to take into consideration. As the world’s economics continue to shift and change, so must your willingness to adapt to the markets. What worked well in the last ten years may not be the place to be for the next ten years. A determination to investigate other investment vehicles and strategies is key to keeping a keen eye on an ever-changing investment landscape.

Get to know what lane you feel the most comfortable driving in, investigate other routes, and make decisions that feel right to help you enjoy the ride.

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hedged and long-only investment strategies via separately managed
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