What’s your risk tolerance?
Risk tolerance is critical to constructing an appropriate portfolio for each individual, but the industry in general does a poor job of using it. The first problem is a lack of standard definitions. Being “aggressive” or “moderate” or an “eight out of 10” can mean very different things to different people. A second major problem associated with risk tolerance is inappropriate application of it. Your willingness to take risk is only part of the equation. Your objectives for taking risk are just as important as your stomach for it.
The key is finding the right combination of need, ability, and willingness to take risk. The step after identifying your risk tolerance is designing a portfolio that properly utilizes it – and that you will stick with. A mismatch between stated risk tolerance and portfolio design can be quite common among investors.
It’s good to keep in mind that higher returns come with higher risk, but on the other hand, being too conservative over time can be just as big of a mistake as taking too much risk.
Take our quiz to find out where you might fall within risk tolerance. Please note, this quiz is designed to help you start thinking about risk tolerance, and should not be used as any sort of definitive guide.
Amin Dabit, CFP®
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