Episode #89 Understanding Risk Tolerance

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Today’s Smart Money Question:

Risk tolerance is a buzzword you often hear in the financial industry. It’s important to understand what it is and how it applies to you as an investor.

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(Click the featured times below to jump forward in the episode)

Here Are Just A Handful Of Things You’ll Learn:

[1:02] -We Don’t Like Jargon.

  • There are lots of confusing concepts and complex jargon in the financial world. Work with an advisor who can explain your financial situation in a way that’s easy to understand.

[3:51] – What Is Risk Tolerance?

  • Risk tolerance simply asks the questions, “How much can your stomach handle seeing your portfolio values drop? How much volatility are you comfortable with in your portfolio?” After all, if you take more risk, you stand to gain more. However, you also stand to lose more.

[5:55] – How Much Emotional Pain Can You Withstand?

  • While we try to remove our emotions from the investing process, they’re always going to play a role. You have to ask yourself how much emotional pain you can take should your investments start to drop in a down market.

[7:14] – People Don’t Always Have A Realistic Approach To Risk Tolerance. 

  • Our clients often indicate to us their quite comfortable with the amount of risk that’s in their portfolio, only to become more and more unsettled as their investments drop. It’s important your actual level of pain tolerance matches up with what you perceive your risk tolerance to be.

[12:04] – How Should Your Risk Tolerance Impact Your Financial Plan?

  • We start most of our consultations by helping our clients to assess their level of risk tolerance. From there, we help them to either adjust the amount of risk in their portfolio or reassess their goals for their portfolio. If you want to be aggressive in your investing strategy, but you have a low tolerance level, something is going to have to give.

[13:54] – Long-term Planning In Retirement.

  • Just because you’re retired doesn’t mean you no longer have to plan long-term. While you’ll certainly need to adjust the amount of volatility in your portfolio, you’ll still need to account for longevity and build a portfolio to last you all the way through your retirement.

[16:29] – How Risky Are Most Investors?

  • This is an interesting question because most folks seek to compare themselves to other investors. However, you really need to solely focus on your own financial situation.

[22:50] – Everyone Is Happy When The Market Is Up.

  • We talk about the bad with our clients way more than we do the good. It’s easy to be excited when the market is performing well. It’s quite another task to be satisfied with your portfolio as Wall Street is crashing. That’s why it’s so important to understand your level of risk tolerance and adjust your portfolio accordingly.

The Answer:

When markets are up, and everyone is fat and happy, my phone's not ringing. When the markets are going down, that's all of a sudden when everyone comes out, and it's about coaching people through that emotional issue. - Matt Hausman
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