You may be wondering, what about when the account values go up? How does risk tolerance play a role here? Great question. When an account value is going up, there is typically not a single person who wishes to cap the upward growth, so the growth then becomes a variable in the risk tolerance measurement. This is because with greater upward growth potential comes the greater downward loss potential. They are relational. The more volatile an investment position is, meaning how often it changes, fluctuates, and moves, the more growth potential it has, but it can move greatly in both directions, both up and down.
To maximize the growth of an account, then the maximum risk is often taken, meaning the investor would also be putting himself in a position to see the potential for both a significant amount of growth and loss. This would be an aggressive type of Risk Tolerance.
To see growth of an account and only a moderate amount of loss, the investor would be willingly setting aside a portion his growth potential to limit the amount of loss in his account value. This would be a moderate type of Risk Tolerance.
To see a little bit of growth of an account and to limit the amount of loss to bare minimums, the investor would be willingly setting aside almost all the growth potential to conserve the account value and experience only a minuscule amount of loss. This would be a conservative type of Risk Tolerance.
So how do you know what your Risk Tolerance is? There are questionnaires financial planner use to help measure your risk. We use a tool called Riskalyze that will give you a score from 1-99 based on your answers. The higher the score, the more aggressive you are. The lower the score, the more conservative you are. Using Riskalyze, you can measure your own Risk Tolerance here. Knowing your risk is important when it comes to investing in the right type of vehicles. It’s just one of the many factors that help financial planners like us make the best recommendations for your investment portfolio. Contact us today to discuss your Risk Tolerance and a complementary consultation! We’d be delighted to help you ensure your investment portfolio is aligned specifically for your risk tolerance and other factors.
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