Financial matters: Assessing your risk tolerance
Special to the Tribune
Before you can identify which investments are well suited to your financial goals, you need to determine your risk tolerance. This is your level of comfort with market volatility and/or the degree to which you are willing to risk the loss of your principal for a potentially greater return.
For example, some people worry about daily or weekly price fluctuations, but others do not. Some have more discretionary income than others and would be less affected by a market downturn than others.
There is no “right” or “wrong” when it comes to your individual attitude toward risk. It’s important, however, to be aware of your feelings in order to work within your own comfort zone. There are five general categories of risk tolerance. They are:
• Very conservative — These investors tend to like investments that are less likely to fluctuate in volatile markets and will forgo potentially higher rates of return in exchange for safety of principal. For example, retirees who are concerned about the impact of a market downturn on their ability to comfortably take retirement income typically prefer a very conservative portfolio.
• Conservative —These investors will tolerate some risk as they seek a reasonable rate of return. Investors who are nearing retirement tend to move toward more conservative portfolios.
• Moderate — These investors tend to like a balanced portfolio of lower risk and higher risk investments.
• Aggressive — These investors are more likely to be comfortable with higher levels of risk for potentially higher levels of return. They tend to have investment goals with longer time horizons.
• Very aggressive — These investors are willing to take a significant amount of risk for potentially higher returns. For example, young people who do not need access to their portfolio holdings for a long period of time may be more comfortable with very aggressive portfolios.
Of course, these levels fall on a spectrum and you may be somewhere in between one category and another. And your portfolio may include a mix of investments in different risk categories. For more help identifying your risk tolerance, use the free risk assessment tool at ameriprise.com or talk with your financial professional.
Rick Gross is a Financial Advisor with Ameriprise Financial Services Inc. in South Lake Tahoe. To contact him, visit http://www.rickgrossadvisor.com.
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