Determining Your Risk Tolerance When Investing

Determining Your Risk Tolerance When Investing

December 07, 2022
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The news is always full of doom and gloom, especially when it comes to the economy. The past couple of years have been no exception—and have created even more anxiety and worry for people around their finances. In stressful economic times like these, it can be tempting to panic. After all, it’s human nature to be averse to loss, and the pain of losing is more powerful than the potential to achieve gains. 

The problem is, when we make emotional decisions, we sometimes act irrationally in an attempt to avoid loss, causing us to lose even more. When it comes to your finances, you know investing is important to grow your portfolio into a nest egg that will sustain you in the future, but how do you know how much risk is too much? Here are some things to consider.  

What Does Risk Tolerance Mean? 

In the financial world, risk tolerance is defined as a measure of one’s financial ability to withstand losses. While you can’t eliminate risk in your portfolio, you can ensure that the amount of risk you take correlates with the level of potential reward for you to gain. It is more than possible to match your investments to your goals while still being able to sleep at night during market downturns.

Here’s the thing we need to remember when we’re tempted to get out of the market ASAP: some risks are avoidable, and some are not. Avoidable risks are those that occur when your portfolio leans too heavily on stocks or bonds that have been unstable in the past or when your holdings are not diversified appropriately. For example, you may be putting too much of your company’s stock in your 401(k) plan. Or you may have an overabundance of overlapping U.S. stock mutual funds instead of being more globally diversified. Avoidable risks often occur when we underestimate risk and believe we can tolerate more than we actually can.

On the other hand, unavoidable risks are those that occur because our world is ever-changing and volatile, and we can’t predict everything. As much as we wish they weren’t, unavoidable risks are simply out of our control. This type of risk includes unfortunate events like geopolitical issues, global pandemics, and economic recessions.

The third category of risk is often unseen, but it can impact your portfolio just as intensely as an obvious risk: the risk of being too conservative and not achieving your future goals as a result. By overestimating risk and trying to avoid loss at any cost, you could be unintentionally sacrificing your future dreams.

How Can I Be Comfortable With Risk? 

Some people seem to be naturally confident when taking risks, while others are more comfortable playing it safe. The truth is that everyone, based on their age, life circumstances, personality, and time horizon, has their own unique risk tolerance level. So how do you determine your specific risk tolerance? 

This is where the expertise of an experienced financial advisor can help. At Favor Wealth, we are dedicated to partnering with our clients to create a personalized, flexible plan that will help them achieve their biggest financial goals and quell their most stressful financial worries. If you are ready to take the next step in your journey to financial freedom, contact us at 626-529-0445 or email Ricky directly at info@favorwealth.com

About Ricky

Ricky Biel is founder, wealth manager, and Chartered Retirement Planning Counselor℠ professional at Favor Wealth, an independent financial advisory firm serving individuals and families near Pasadena, California. Ricky Biel founded Favor Wealth with a desire to provide unbiased, client-centered, community-based financial advice. Ricky and his team of caring, smart professionals want their clients to feel like they’ve done them a favor, making it easier than ever to accomplish their financial goals by blending proven investment methodologies with creative financial technologies. He is on a mission to help his family of clients feel both a sense of relief and excitement about their future. Favor Wealth takes care of its client's needs first and foremost and goes the extra mile to make its clients’ finances grow. To meet and see how the Favor Wealth team may be able to help, contact them today at 626-529-0445 or email Ricky directly at info@favorwealth.com

The commentary on this blog/website reflects the personal opinions, viewpoints, and analyses of the Favor Wealth Advisors’ employees providing such comments, and should not be regarded as a description of advisory services provided by Favor Wealth Advisors or performance returns of any Favor Wealth Advisors’ Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Favor Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.