Taking a Risk Assessment: Knowing Your Risk Tolerance
Do you know how much risk are you willing or able to take when it comes to your investments? That’s a question that your financial advisor is ready to help you answer, and it’s an important one when it comes to meeting your financial goals.
Would you categorize yourself as an aggressive, moderate, or conservative investor? Turns out you might be in an entirely different category than you think. We’re here to help you understand what’s involved in determining your risk, and how your financial advisor will use that to structure your investments and keep you on track to meeting your financial objectives.
The Risk Tolerance Questionnaire
When we first meet with you and are getting to know you, one of the first things we have you do is take our Risk Tolerance Questionnaire. This questionnaire is made up of 25 questions that are designed to help us determine your comfort level and willingness to take risk.
The questions are multiple choice and ask about your attitudes, values, and experiences. There are no right or wrong answers; you simply pick which answers to each question you feel are the best fit. Your responses help us arrive at a scientific risk assessment that’s personalized to you.
Just as important, the questionnaire is a starting point for conversations between us and you around investing and your financial life. Once you complete the questionnaire, we’ll spend some time with you diving into your answers and having a detailed discussion about risk.
“We’re trying to marry two things: What can your stomach handle and what is your financial plan going to require in order to meet your financial goals?” says Lauren Chavez, Associate Advisor with Ironwood Wealth Management.
Of course, as life happens, circumstances and goals are subject to change, and these changes can alter our tolerance for risk. For that reason, we have clients fill out the questionnaire about once every five years, or in the event of a major life adjustment.
Additional Factors That Help Determine Risk
We will also take into consideration a number of factors beyond your questionnaire responses: Age, time horizon, goal retirement age, spending limits, and health, to name a few.
Another factor: Your past reaction to market volatility. Understanding how you responded to the Great Recession of 2008, for example, or even the most recent market pullback due to COVID-19, will go a long way in informing us about your willingness to take risk with investments.
“Did you want to pull money out and go straight to cash? Were you on the opposite end of the spectrum and wanted to drop money into the market? When we can talk about real-life events, it makes the discussion that much more valuable,” Lauren says.
The Right Match: Your Risk Tolerance + Your Investment Policy
Ultimately, we want to ensure that there’s congruency between your willingness and ability to take risk and your actual investments. To do this, we work with you to develop an investment policy and to put it in writing. Your Investment Policy Statement clearly establishes your expectations, objectives and guidelines for your portfolio and provides you with a framework from which to make sound investment decisions.
This way, in periods of downturn, you have a written document you can turn to that will give you confidence and reinforce the prudence of your plan.
Why is this so important ? Whether we realize it or not, emotions play a huge role in our financial decision-making, and even in how we feel about risk in a given moment. For optimal long-term gains, it’s essential that we have an unemotional document that’s created out of an objective risk assessment to guide our financial decisions.
“Every investor is going to be different. Circumstances are different, goals are different, and comfort levels are different, and having a strong, real conversation about risk is so crucial to helping you meet your goals,” says Lauren.
Ready to get started in understanding your risk tolerance and developing the right financial plan for you? Contact us to learn about our relationship-oriented approach to wealth management.
Disclaimer: The information provided in this article is not intended under any circumstances to be investment advice.