Does your risk tolerance match your risk capacity?

From: REAP, LLC. | Retirement & Estate Advisors & Professionals

When it comes to investing, there is no reward without risk. But risk comes in different forms, and understanding the variations and contexts can help you become savvier and steadier when it comes to your money.

Risk Tolerance
An investor’s comfort level with risk is often personal. Risk tolerance, the amount of risk you are personally comfortable with, may not match your risk capacity, the amount of risk you must take in order to reach your goals. This mismatch is common among investors, because as one moves through life alongside major world events (like the financial crisis in 2008), one’s comfort level with risk can change.

Necessary Adjustments
Consider someone who has only begun saving for retirement in their 50s, but cannot stomach a high degree of exposure to the financial markets. To meet their goal of a financially secure retirement, they may have to make other adjustments such as:

• Tightening spending
• Downsizing their lifestyle
• Kicking their career hustle into high gear to improve income earnings
• Taking excellent care of health to forestall expensive medical expenses
• Delaying retirement

Other Risk Factors
There are also nonpersonal risk factors you must also take into account. When the health of a particular company or an entire industry begins to falter, a portfolio with a high concentration of these holdings may be disproportionately affected. And for international investors, global headlines of government mishaps can also impact a portfolio’s return.

Ultimately, it’s crucial that you understand there are certain things you can and cannot control when it comes to your investment strategy. That’s why it’s important to check your risk tolerance regularly to make sure your investment strategy reflects your personal approach while keeping your goals in mind.

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