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How Much Risk is Right for You?

Risk is a normal part of investing - in fact, some risk is actually beneficial and serves a valuable purpose. If investors didn’t accept some risk, there wouldn’t be the potential to achieve higher returns. However, it’s important to ensure you’re not taking on unnecessary risk.

The goal is to determine what level of risk you’re comfortable accepting and then balance it with the required risk necessary to achieve your long-term goals.

The balancing act

Sometimes there is a discrepancy between how much risk you are comfortable taking and how much you actually have to take to achieve your goals. This is where you may need to make some important decisions. Your financial advisor can help you build a portfolio that balances your risk tolerance, capacity for risk and the risk you’re required to take with your financial goals.

Determining the right level of risk

While risk may come in many forms, determining your risk level covers three main areas:

  1. Risk Tolerance
    Gauging risk tolerance and your potential behavior is important because it’s unlikely you’ll reach your long-term goals if you abandon your strategy during the inevitable short-term market decline. Typically, you’ll be asked to complete a questionnaire that’s used to gauge how you might react to risk in different situations.
  2. Risk Capacity
    Risk capacity considers your ability to handle risk, and your investment time horizon is often one of the biggest determining factors. For example, if you’re younger and preparing for retirement, you have a long time to make up for potential declines and could reasonably handle more volatility. However, if you’re retired, your ability to handle stock market declines is likely smaller. Other items, such as income needs, may also influence your risk capacity.
  3. Required Risk
    What level of risk that is required to achieve your investment goals? The higher the return that is needed to reach your goals, the more potential risk you’ll need to take to achieve them. As you discuss your goals with your Edward Jones financial advisor, you can determine the risk/return trade-off you need to achieve them.

Risk, your emotions and your success

Typically, what prevents most investors from reaching their goals is not market volatility itself, but the investor’s reaction to this volatility. Understanding your comfort level with risk can only make you a better investor and perhaps avoid some emotional investing mistakes, like chasing performance. By knowing your risk tolerance in advance, you can better stick to your long-term strategy during the inevitable market corrections along the way.

Action for investors

It’s important to discuss with your financial advisor your goals and the amount of risk you’re willing to take to reach them. You may need to make some difficult decisions in order to create an appropriate investment strategy that fits your needs - but, ultimately, these decisions may help you avoid the biggest risk you face: not reaching your financial goals.

More resources:

Putting Your Performance into Perspective

Market returns are important, but how do they relate to your needs and goals?

Our Research

We are very selective about the types of investments we recommend.

The Risk of Not Investing

Although investing poses risks, such as the risk of declines, not investing can also be a risk to your financial future. The key is finding balance.

What You Need to Know About Asset Allocation

The best asset allocation is one that is designed to help you reach your financial goals.

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