Ever wonder why some investors stay calm during market swings while others panic? It often comes down to how well they understand and account for risk tolerance – and their ability to see investing as a long game.
While you can’t control the market swings, you can control how you respond to them. That starts with knowing how much risk you’re willing and able to take. Aligning your investment strategy with your comfort level is the foundation of long-term investment success.
In this article, we break down the difference between risk tolerance and risk appetite, explain why some risk is essential for long-term growth, and share how our free 5-minute Risk Assessment can help you define your comfort zone and use it to guide your investment strategy.
Determining your risk tolerance helps you inform your asset allocation and security-level decisions. For example, an 80% stocks/ 20% fixed income allocation would align with a more aggressive risk tolerance.
However, risk tolerance is only one part of the equation. You’ll also need to understand your risk appetite to complete your investment profile.
| Category | Risk Tolerance | Risk Appetite |
|---|---|---|
| Definition | A measurable threshold of how much risk you can and need to take to achieve your goals. | A less measurable concept that reflects your emotional comfort with taking on risk. |
| Ask Yourself | How much risk am I able to take? | How much risk am I willing to take? |
| Consider |
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Understanding each concept and how it affects your portfolio is critical. Risk tolerance and risk appetite form the foundation of your overall comfort with investing risk.
Advisor Tip:
Take our 5-minute Risk Assessment to learn more about your comfort level with investing risk. For our clients, we use these results to gauge risk tolerance and appetite, then run computer-based simulations to evaluate their estimated chances of meeting their goals. This helps us design the proper asset allocation and risk strategy tailored to everyone’s unique financial situation.
Measure your risk tolerance in just 5 minutes with our Investor Risk Assessment.
Our free 5-minute assessment helps you understand your ability and willingness to take investment risks.
Once you determine your risk tolerance and appetite, use them – along with your goals, timeline, and portfolio size – to guide your investment strategy.
Two important investment rules to remember:
A sudden drop in your portfolio’s value can trigger emotional reactions, even for the most disciplined investors. Investing is emotional, and it’s not always easy to act rationally when your money is involved.
While taking risks can be uncomfortable, avoiding them altogether can be just as damaging. A portfolio without risk loses value to inflation, eroding your purchasing power and future financial security. Investing wisely means accepting market ups and downs while staying focused on long-term growth.
At Toberman Becker Wealth, we help clients manage risk through disciplined planning. We encourage them to:
With this approach, you can find strength and certainty in hard times, knowing you have the resources to “weather the storm” and let the market recover.
Together, we’ll assess your entire financial situation to ensure your investment plan is fine-tuned for success and built to last. We’ll align your portfolio with your risk tolerance so you can stay on track and avoid common investing pitfalls.
Your risk tolerance is a critical variable within your investment plan. Plan and discuss potential changes to your portfolio to ensure they are never a surprise. If history is any indication, we can set our rough expectations and mindset to plan for the following:
Putting these in dollar terms early on helps you envision what you might be able to stomach in real life.
Understanding your risk tolerance is a critical step to building an investment strategy, but it’s just one part of an ongoing conversation about your comprehensive investment plan. Understanding and actively discussing all the facets of risk up front is critical to investing and retirement planning success. At Toberman Becker Wealth, we take a comprehensive approach to investment risk management.
You often have a higher risk tolerance when you’re years from retirement and can weather short-term market fluctuations. A longer investment horizon allows more time for the market to recover from downturns. However, some people approaching retirement may maintain a higher risk tolerance and appetite if they expect to outlive their assets or are beginning to invest for next-generation legacy goals.
Risk tolerance often declines during retirement, when regular income is limited and preserving accumulated wealth becomes the priority. Generally, retirement investments might be more focused on stability over aggressive growth.
Your risk tolerance shifts as your goals, responsibilities, and timelines evolve. Generally, the longer your time horizon, the more aggressive your investment approach. As you approach key milestones, your risk tolerance tends to decrease, and your strategy often adjusts accordingly.
Craig Toberman is a Partner at Toberman Becker Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.