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What is Risk Tolerance, and What Does it Mean for You?

What is Risk Tolerance, and What Does it Mean for You? Fitzwilliams Financial

The term “risk tolerance” gets thrown around a lot when it comes to investing. So, what does it mean, and how does it relate to retirement?

In simple terms, risk tolerance is how comfortable you are with potentially losing money on an investment.[1] If you don’t want to lose any money at all from your investments, you would be considered to have a low risk tolerance.[1] If you are okay with potentially losing some money, you would be considered to have moderate risk tolerance.[1] And if you are comfortable with potentially losing a lot of money, then you are considered to have aggressive risk tolerance.[1] These are all relative terms and may manifest differently given your unique financial situation and the asset or investment in question.

So, what is the benefit of having aggressive risk tolerance? Why would someone be okay with potentially losing a lot of money? A well-designed aggressive portfolio may be desirable because, generally, it comes with the possibility of relatively higher returns.[1] This style of investing is not for everyone and is not guaranteed to pay off. It is entirely possible to lose money from this style of investment, but some people are looking for this kind of investment based on their specific financial situation.

Conservative portfolios tend to be important when it comes to retirement because as a person approaches retirement age and is closing in on their total wealth level, they often look to reduce the risk of losing their investments. They might shift their assets into guaranteed vehicles like CDs and short-term T-bills.[1] Again, this strategy isn’t right for everyone, but it is an investing approach commonly incorporated into a retirement strategy.

Risk tolerance is a hard thing to figure out. Some people have an innate sense of what they are willing to risk, and for others, it takes time and experience before they come to understand what is best for their situation.

The finance world is complicated. There are many different puzzle pieces to your wealth management picture. If you are interested in talking with someone to guide you through that world, consider reaching out to one of our professionals today for a complimentary review of your situation.

 

 

This article is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision.

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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