What's Your Risk Comfort Level?

By definition, all investments involve a trade-off between risk and return. A certain amount of risk is inevitable if you want your money to grow. The key is determining how much risk you feel comfortable with.

Understanding Your Risk Tolerance

Are you uncomfortable with change? Can you stick with your long-term strategy even if you face short-term losses? Will you be overly anxious the first time your investments drop in value? These are all questions to answer before developing your strategy.

Understanding your personal risk tolerance will help you create a plan you can stick with through good times and bad. Many investors forget the risks involved with buying stocks when the market is soaring. It's easy to be tempted by the lure of sky-high returns and to forget the possibility of a market downturn, or worse, of a bear market. Likewise, during a bear market or a sharp drop in the market, many investors suddenly become extremely risk averse. But if you create a plan built around your personal risk tolerance and stick with that plan, you will avoid having to make sudden changes in your investment strategy as the market changes.

Factors That May Affect Your Risk Tolerance

Although your personality will affect your underlying risk tolerance, your stage of life also will affect it. Are you just getting started, supporting a growing family or approaching retirement? The amount of risk you feel comfortable taking may be very different at each of these stages in your life.

Most people aren't prepared for the risk posed by being 100% invested in stocks. But younger investors saving for retirement may be able to afford the risk of placing the bulk of their money in stocks. Why? Because in modern U.S. stock market history, investors have never lost real money investing over a 15-year period. Over a 10-year period, the odds of making money are more than 90%. So stocks have proven to be the best investment over the long term and will likely continue to be unless the U.S. economy crashes to a halt. What's more, younger investors have the ability to "catch up" by continuing to earn money they can put away toward retirement.

On the other hand, as you move closer to retirement, or if you will need a portion of your money in the short term, you may be better off foregoing the highest returns and putting your money in investments that are more secure, such as short-term bonds or money market accounts.

But even investors with similar personalities and in the same stage of life may have different risk tolerances because of the following factors.

Job security and future employment prospects. If you work in an industry with high turnover, you may be willing to risk less than if you are in a stable position with room for growth.

The amount of disposable income available for investing. If you are investing millions you may be more comfortable taking risks than if you have only a few thousand dollars to work with.

The risk of an unexpected financial burden. If you are the sole income provider for your family, your tolerance may be lower than if your spouse also earns a good living.

"No pain, no gain," the exercise gurus of the past once told us. And while there can be painless gains in the short term with more volatile investments such as stocks, recent history has taught us that staying the course and recognizing our tolerance for risk can ease the pain even as we pursue gains. Let us help you determine what your risk tolerance is, then develop a program tailored to it.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

To the extent any of the material on this Web Site contains an opinion on one or more Federal tax issues, such opinion cannot be relied upon and cannot be used for the purpose of avoiding penalties.  If you would like a written opinion on one or more of the Federal tax issues addressed on this Web Site or the material enclosed upon which you can rely for the purpose of avoiding penalties you should contact a licensed lawyer.  Nothing contained on this Web Site & none of the documents you are given through this Web Site  are or should be interpreted as legal or tax advice. You should not take any action upon anything contained on this Web Site or any of the documents you are given on this Web Site unless and until you first discuss the individual fact situation with an attorney licensed in your state who is knowledgeable in Federal tax issues and the tax issues relative to the state in which you reside.