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