Everyone has a certain risk tolerance. Knowing yours can dramatically impact your investment strategy.
By taking the quiz at the end of this article, you’ll know if your risk tolerance is conservative, moderate, or aggressive.
Once you know and understand your risk tolerance, you’ll be able to set up and adjust your portfolio accordingly.
Everyone is looking for the silver bullet when it comes to investing. Even though that doesn’t exist, having a viable investment strategy may be the next best thing when it comes to setting financial goals.
Of course, there are a lot of moving parts when formulating a strategy and assembling an investment portfolio, and one of the most important considerations in both of those actions is assessing risk. If you doubt just how big a role it plays in the whole process, look no further than the famous disclaimer: “past performance does not guarantee future results.” Your comfort level with that phrase is probably a pretty good (albeit highly unscientific) gauge of what’s called your risk tolerance.
This article (and the following quiz) will define risk tolerance, help you understand what yours is, and provide you some insights into what you should do according to your level of risk tolerance.
What is risk tolerance?
An investor’s risk tolerance is a measure of the volatility and potential loss an investor is willing to accept, comprised of several different elements. Understanding each of these is significant on their own merit, but considered as a whole, they make up a critically important body of criteria you need to acknowledge to optimize your portfolio as you make investment decisions. A few of these include comfort level with risk, familiarity with asset classes, and working knowledge of asset allocation.
There are quite a few variables that make up each investor’s risk tolerance, including their age, timeline, and individual goals. When taking all of those into account, it’s easy to see why investors with different levels of risk tolerance will invest in different types of assets based on their unique situations. It’s really about a balance of all these factors. For example, a 20-year-old may not want to have a conservative retirement portfolio just because that’s a personal preference. Instead, a younger investor may want to be more aggressive because they have a much longer time horizon to play with that can balance out any short-term losses over the longer term. As you read on, remember to balance all the factors at play to see how this directly impacts you and your risk tolerance.
Understanding risk tolerance
Now that you have all the necessary elements of risk tolerance firmly in your sights, it’s time to practically assess how they can impact your actual portfolio. We call this assessment “rebalancing,” and it can make all the difference between your portfolio staying stagnant and seeing sustained growth over time. Investors account for risk tolerance when making decisions for their portfolio. In short, the goal of this article is to help you determine your risk tolerance so that you can invest and rebalance your portfolio accordingly.
To maximize your investment strategy, you need to fully explore and understand the risk and return levels for different asset classes. This introspective look will help you establish which risk level you best identify with. Please note that while people can toe the line between risk levels, investors are generally classified as conservative, moderate, or aggressive.1 Here's a brief, high-level snapshot of each.
Conservative Risk Tolerance
Conservative investors, defined as those who have little tolerance for risk, tend to avoid exposure to investments that have a chance of losses. Because they have an inherent need to protect their core nest egg from any volatility, conservative investors tend to be older in age, have a short-term investment strategy, and have a strong understanding of higher risk investments. An example conservative portfolio might contain the following assets in the suggested quantities: 5-15% in cash, 60-65% in fixed income, and 25-30% in equities.
Moderate Risk Tolerance
Moderate investors are all about a balanced strategy. They want to grow their income without too many losses. These types of investors will have a mix of assets with varying levels of risk that average out in the middle in terms of risk. An example moderate portfolio might contain the following assets in the suggested quantities: 5-10% in cash, 35-40% in fixed income, and 50-55% in equities.
Aggressive Risk Tolerance
Aggressive investors, as expected, have a high risk tolerance, tend to be younger, typically have a longer time horizon, and tend to emphasize capital appreciation (growth in value of investments) instead of income or preservation of principal.1 Higher risk portfolios also tend to have mostly stocks and minimal cash or fixed income.1 An example aggressive portfolio might contain the following assets in the suggested quantities: 0-10% in cash, 0-10% in fixed income, and 80-100% in equities.
As you evaluate your risk tolerance, it will quickly become apparent which bucket you fall into — conservative, moderate, or aggressive. Depending on your age, investment strategy, and goals, you’ll be able to align your portfolio to that risk tolerance style in an effort to maximize your returns. But why guess which one you are? Take our quiz and find out now.
Things to consider
Knowing your risk tolerance may help you optimize your investment portfolio.
As you become more familiar with your risk tolerance, you might decide to rebalance your portfolio to reflect that thinking.
Talk to your financial professional to learn even more about your risk tolerance and how it could influence your financial plan.
All investments involve risk, including loss of principal, and there is no guarantee of profits. Investors should carefully consider their objectives, risk tolerance, and time horizon before investing. There is no assurance that any investor will meet their investment objectives.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
