Understand What “Risk Tolerance” & “Time Horizon” Mean
Whether you’re charting your own financial course (with your own savings or your 401(k) investments) or working with and advisor, it’s essential to understand that you cannot eliminate risk. But it can be managed. When you’re planning, make sure you understand two key components to laying out your plan.
One concept you should consider is your time horizon. What point on your life timeline do you plan on retiring? It sounds like an easy question, but as you explore the reality of that age, and how many years you have to prepare for it, you may soon discover you’ll need additional time or more aggressive saving.
Another key concept to making planning decisions is your tolerance for risk. When the markets went down in March, how did you deal with the drop in the market, did you want to sell everything? Buy more?
- Knowing your time horizon will help you with your capacity for risk
- If you know your time horizon is many years or decades away, you may be able to better handle massive swings in the markets
- If your time horizon is a much smaller time frame, big losses maybe be difficult to recover from
- Just like in sports, dieting, and other parts of life, we all have a personality in our approach that tries to balance risk and reward
- Some people when they play softball swing for the fences
- Some folks get nervous when the doorbell rings
- Some people can’t enjoy fatty foods because they don’t want to risk potential harm
- No one is wrong – except those who think they’re one type of person, but really aren’t
- We’ve had long discussions with folks who believe they’re aggressive but don’t understand fluctuations in the markets
- You may think you’re conservative, but may be more aggressive, and vice-versa
- Often risk tolerance and capacity are discovered by answering a number of questions about how you’d react to risk
- At Annex Wealth Management, we require our clients to answer a number of questions that give us a genuine insight on your capacity for risk
- We have recently adopted technology which enhances and provides greater detail on what type of investor you are. We use that scoring system to help your plan and portfolio reflect you