How to Determine Your Risk Tolerance for Investing

 All investing comes with risk, and not everyone feels the same way about that risk. It's crucial to know the level you're comfortable with, so you can choose the mix of investments that’s right for you. 

What Is Risk Tolerance? 

Risk tolerance in investing is “the degree of risk an investor is willing to endure.” It’s your comfort level in possibly losing money in the short term because that could lead to a bigger gain in the long term. Your risk tolerance is important, because it helps you decide what types of investments you want to include in your portfolio. 

High Risk Tolerance 

If you have a high risk tolerance, you’re more comfortable with taking the chance that you might face short-term losses. You’re aiming for larger gains over time, perhaps because you are a younger investor further from needing access to that money. Investors like you typically invest heavily in stocks because they give their portfolios the best odds of growth in the long run. 

Moderate Risk Tolerance 

If you have a moderate risk tolerance, you want your portfolio to grow, but you’re not comfortable with too much loss. Most investors like you have a portfolio with a balance of stocks and bonds.  

Low Risk Tolerance

If you have a low risk tolerance, you don’t want to risk losing money and you probably want to be able to access it relatively easily, perhaps because you are approaching or in retirement. Investors like you might invest more heavily in U.S. Treasury bonds, money market accounts or certificates of deposit than higher-risk investors. 

Your Risk Tolerance May Change 

When do you typically have the highest investment risk tolerance? Your risk tolerance is usually highest when you’re younger, and it may get lower as you get older. That’s because when you’re younger, you have more time for your investments to grow. So, you can ride out downturns without worrying about needing to withdraw money soon. 

When you’re older, you probably have more money invested and you need access to that money in a relatively short time frame. So, a downturn has a bigger impact in actual dollars. For example, suppose the stock market drops 10 percent. A 25-year-old with $10,000 invested would see their portfolio drop $1,000. A 60-year-old with $1,000,000 invested would see a drop of $100,000 and wouldn’t necessarily have the time to wait for the market to rebound before they need access to those funds. 

How Do You Know Your Risk Tolerance? 

It’s hard to know exactly how well you’ll tolerate risk until you’re faced with it. You want your investments to grow, but you don’t want stress over potentially losing money to impact your life. You want to be comfortable enough that you aren’t tempted to pull money out of the market in a downturn, which would lock in your losses. On the flip side, you want your money to work for you.  

 A Farm Bureau agent or financial advisor can help you discover your risk tolerance with a specially designed software.  

Talk About Your Investments 

Once you know your risk tolerance, a local Farm Bureau agent or financial advisor can use that information to make tailored suggestions.  They can walk you through the potential risk and benefits of different types of investments and help you understand how they can move you toward your goals in a way that works for you. Reach out today to talk.