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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 people think about retirement planning, they often focus on one question: How much money will I need?

I believe another question can be just as important: What will that money be able to buy?

Inflation can gradually change the cost of groceries, housing, healthcare, transportation, travel, and many of the other expenses people may encounter throughout retirement. As those costs change, the purchasing power of a dollar may change with them.

That is why retirement planning can involve more than building an account balance or reaching a particular savings target. A comprehensive financial plan may also need to consider future

spending, retirement income needs, time horizon, inflation, investment strategy, and how someone’s financial circumstances could evolve over time.

In this Financial Forecast discussion, I explore how inflation can affect everyday expenses and why purchasing power may matter when evaluating a long-term retirement strategy. I also discuss why investors may benefit from looking at their financial decisions within the broader context of their goals rather than focusing on any one economic factor in isolation.

No one can know exactly what prices, markets, or economic conditions will look like years from now. Planning can instead involve evaluating different possibilities and building a strategy that may be able to adapt as circumstances change.

Watch the video to learn more about how inflation and changing expenses can fit into the retirement planning conversation.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment advisor. FWM and Fitzwilliams Financial are affiliated companies. The content in this video is for informational purposes only and is not personalized investment advice or a solicitation to buy or sell any security. We do not provide tax or legal advice. Media appearances are for informational purposes only and do not constitute an endorsement. Investing involves risk.
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