Investing can feel like a balancing act—especially when it comes to figuring out how much risk is right for you. You’ve probably heard the term “risk tolerance” tossed around, but what does it really mean, and how do you know if you’re taking on too much risk with your investments? In this post, we’ll explore how to understand your own risk tolerance, when it’s time to scale back, and how to make sure you’re investing in a way that gives you peace of mind.
Understanding Risk Tolerance: How Much Risk Can You Handle?
Risk tolerance is essentially how much volatility you’re comfortable with in your investments. It’s about how much uncertainty you can handle without losing sleep at night. For example, if the idea of losing money in the market makes you anxious, you may have a lower risk tolerance and should choose more conservative investments.
To get a better idea of your risk tolerance, many people work with a CERTIFIED FINANCIAL PLANNER™ (CFP®) who might ask you to fill out a risk questionnaire. This is a great way to assess what types of investments fit your emotional comfort level, timeline, and financial goals.
But beyond the questionnaire, it’s important to pay attention to your own feelings. If you’re constantly thinking about your investments during the day and find yourself waking up in the middle of the night worrying about your money, it’s a sign that you might be taking on more risk than you’re comfortable with.
When to Scale Back: Are You Feeling Stressed About Your Investments?
One of the clearest signs that you’re taking on too much risk is how much stress you’re experiencing. If your investments are keeping you up at night or making you anxious during the day, it could be time to scale back.
It’s important to choose investments that align with your level of comfort. If you’re nervous about losing money, it might make sense to reduce the amount of risk you’re taking on and reallocate your funds into investments that feel more secure to you. Remember, investing should work for you, not against your peace of mind!
Understanding Your Investments: The Key to Feeling in Control
Another reason you might feel uneasy about your investments is that you don’t fully understand them. When you invest in something you don’t quite grasp, the uncertainty can lead to anxiety. It’s essential to only invest in things that you have a solid understanding of.
If you’re unsure how your investments work, take some time to research and educate yourself, or sit down with your CFP® to gain a deeper understanding of how your portfolio is designed to grow. Often, just getting a better grasp of how your investments are structured and what kind of returns you can expect will help you feel more in control and reduce stress.
Consider Your Big Picture: How Life Factors Into Your Investment Risk
Investing isn’t just about picking the right stocks or bonds; it’s about fitting those decisions into your broader financial plan. Several life factors can influence how much risk you can afford to take:
- Income Stability: If you have a reliable, stable job, you may be able to take on more risk. But if your income is uncertain, it might make sense to adopt a more conservative approach to investing.
- Living Expenses: Have your living expenses changed recently? Unexpected increases in bills can disrupt your financial outlook and increase your need for stability in your investments.
- Financial Goals: Are you on track to meet your long-term goals, like retirement? It’s essential to ensure that the level of risk you’re taking matches your ability to meet these milestones without jeopardizing your financial security.
How a CERTIFIED FINANCIAL PLANNER™ Can Help You Assess Your Risk
If you’re still uncertain about your risk tolerance, or if you’re questioning whether your current investment strategy is aligned with your financial goals, it’s a great idea to work with a CERTIFIED FINANCIAL PLANNER™ (CFP®). A CFP® can help you:
- Assess your risk tolerance and make sure your investments align with your comfort level.
- Understand the emotional and financial aspects of risk-taking.
- Guide you in adjusting your portfolio to better fit your needs.
With the help of a professional, you can find a balance between risk and security that lets you feel confident in your investment choices.