Risk Management for Your PortfolioSubmitted by CalBay Investments, Inc. on February 19th, 2017
Risk tolerance is known as your specific ability to tolerate ups and downs within the market, and over time this should impact the variety you have within your investment portfolio. Every investor has different ranges of acceptable risk when entrusting their money to the stock markets. While some are willing to put it all on the line in search of greater returns, others prefer a conservative approach with modest growth potential over the course of time. Risk tolerance is based on personal impacts and judgements, but what remains the same within each approach is the management of each risk.
The Impact of Risk Tolerance
First and foremost, it is important that you determine your risk tolerance prior to investing. From there, you want to maintain a consistent pace within your specified zone throughout your investment period. Per Portfolio Solutions, asset allocation within your investment portfolio can account for over 90% of its long-term return and the risk characteristics of your investing. This exact study is why preparation prior to investments is a crucial step in your plan for success.
Risk Tolerance through Asset Allocation
It is necessary that you review your assets on a regular basis to ensure that your allocation of stocks, bonds, mutual funds, etc. remain balanced enough to pursue your investing goals. Asset allocation can allow your investment portfolio to experience too much or too little risk over time. It is important you give your asset allocation enough attention so it does not become unbalanced and fluctuate your investment portfolio. Having said that, be sure to keep your balance of allocation within your acceptable range of risk tolerance.
Asset allocation does not ensure a profit or protect against a loss.
Different Investments, Different Risks
Different types of investments come with varying levels of risk. Market risk plays into all your investing decisions, and in turn, your risk tolerance will be affected too. Market conditions can impact the overall prices of bonds and equities, which alters the way individuals invest. With an ever-changing market, you have some power with mitigating the impact of market conditions, to a degree, by researching potential investments to determine the likelihood of strong growth based upon management, profitability, and the industry outlook.
Understanding the Individual: Within the Risk Tolerance Process
It appears, the younger someone is, the further away their investment horizon is. This does not have to be the case when considering the benefits of a young investor. At a younger age, one could afford to be more aggressive in their portfolio's risk. They even could act conservatively and wait to let time and compound interest workout for their budget and goals.
No two people have the exact same investing goals or levels of risk tolerance. An older investor has different goals and investment plans. They perhaps are focused on closing in on retirement to guard against risk. The personality type of each investor includes their personal background, career path, and current investment portfolio. Considering these factors will tell you a lot about yourself and help you assess your own risk tolerance.
Seeking a Financial Advisor
If you are unsure about your risk tolerance, be sure to consult with a financial advisor. Speaking with a financial advisor makes it easier to navigate through the various investment choices before you make them, and allows you to build a snapshot of your personal financial situation. You can use that to assess your goals and objectives, and create a balanced investment portfolio that accurately aligns with your risk tolerance. Contact CalBay Investments today.