Goal: Portfolio design is a balancing act between two objectives:
1. A high likelihood of reaching your goals, and
2. Your portfolio should match your risk tolerance. To estimate your risk tolerance, consider using online tools available from various financial institutions or regulatory organizations. Be cautious when using these tools, as they may not fully capture your unique circumstances. Some more advanced risk tolerance tools might be available exclusively through financial advisors. Working with a professional can provide access to these resources and personalized guidance.
Risks: Ideally, your portfolio finds a balance that you can tolerate through good times and bad. The amount of risk you take with your portfolio may mean the difference between failure and success in meeting your goal. Take too little risk, and you may not get enough return. Take too much risk, and a bear market at a critical time can torpedo a major life goal.
Others: You and your partner may have very different risk tolerance. Be sure you are discussing this.
Time: Risk tolerance should not change more often than every five years or more. Some people change their overall allocation in response to market events. This is actually a sign of a change in Risk Perception, not Risk Tolerance.
Note: When using risk tolerance tools, consider the following pros and cons:
Pros: These tools can provide a starting point for understanding your risk tolerance and help initiate conversations with your partner or financial advisor.
Cons: Risk tolerance tools may not capture your complete financial picture, unique circumstances, or changing life situations.
Question: Does your Investment Portfolio match your Goals and Risk Tolerance?