Trying to measure how comfortable we are with the concept of risk tolerance is challenging for many people. There’s a plethora of tools out there to get this crucial metric right, but really it comes down to this: How accurately we assess risk.
Risk Tolerance
It can be stressful for the person: Even though there are no right/wrong answers, it can feel like they ‘should’ be more aggressive than they really are.
Because when assets start to perform in a way we don’t like (this happens to every asset class, by the way), and we didn’t expect that or anticipate it, disappointment takes place.
Financial Planning and Risk Profile
It’s a Financial Planner’s job to make sure a client is comfortable asking any question about risk tolerance.
It’s your Financial Planner’s role to put you at ease and to, working with you, provide a plan that you are confident in and feel empowered by.
It is a Financial Planner’s responsibility to step back and check in regularly with you through the process.
This is to ensure your questions are getting addressed and to ensure you are comfortable with the process.
Your Financial Planner should address risk tolerance and risk capacity.
This ensures 2 things: 1) You understand the concepts of risk and 2) You are comfortable answering it accurately.
Risk Phases
A client in their 20s is oftentimes pressured to be all in stocks because ‘they have time on their side’. But perhaps what needs to take place first is a better understanding of how markets work and how various asset classes respond to various economic realities. And then, once they better understand volatility and asset classes, are they then more comfortable in a more aggressive asset mix.
Then, once they are more comfortable with it, and if they are more comfortable taking on more risk that would allow them to meet their goals more effectively, would a more aggressive asset mix take place.
Don’t let peer pressure or general investment recommendations influence you to take on more risk than you are comfortable with.
At the end of the day, it is your money, your investments, your financial future, and your financial plan.
Next Step
Ready to take the next step and work with a fee-only CFP? Reach out to schedule a Discovery Meeting to learn more.