by BRAD CALDWELL, FINANCIAL PLANNER, PARTNER
When determining your financial risk tolerance, you may be asked questions like:
When determining your financial risk tolerance, you may be asked questions like:
- What is your age?
- What is your monthly income?
- What do you expect to be your next big expense (a house, paying for your children’s education, retirement)?
- When do you expect to use the money in your investment accounts (five years, 10 years, 30 years)?
- What are your goals for your investments (to grow your assets or protect your assets)?
- You just won $100,000 in a gameshow. Do you walk away with the money or do you continue to play, risking it all?
- Have you experienced a bear market? A bull market? If so, how did you feel?
- How much do you need to reach your financial goals?
Now, answer these questions as if you were in your 30s.
Answer them as if you were married.
Answer them as if you were single.
Answer them as a parent with young children.
Answer them as if you just turned 60.
Did your answers change?
Chances are, they did, which is why your financial plan, and your risk tolerance, should be reviewed on a regular basis and updated accordingly.
Although risk tolerance depends to some degree on your psychology, it also depends on other factors in your life. With that in mind, your risk tolerance might change over time. In our experience helping clients plan for the future, there are 8 life events that can significantly influence your risk tolerance.
Have questions about your financial future? TrustCore is here to help. Contact our team and start a conversation.
Divorce
Divorce can upend you both emotionally and financially. You may be paying child support or dividing assets, such as the worth of a home or retirement accounts. You may be retraining from a career after having spent time raising a family.
As you navigate life on your own, you may not be as comfortable with the amount of risk you may have once taken in your financial plan. As you get settled, however, that might change. On the other hand, if you end up with comfortable assets, your appetite for risk could increase. Talk to a financial advisor and create a plan.
Loss of a Spouse
If you’ve lost a spouse, you may also undergo a period when your risk tolerance lessens. You may need to determine a plan to support a family on your own, or you may need to make some significant changes in your life, such as moving and wanting your assets to remain stable.
Be sure to revisit your risk tolerance once the period of mourning and readjustment is over. It’s not wise to make important life-changing decisions that could be rooted in emotion. However, you don’t want to ignore them forever either.
Loss of a Job
Job loss can be traumatic. It can threaten you financially and emotionally. Of course, not having an income or having a lesser income can also have a major impact on your feelings about market swings and your assets! Drops in the market that may not seem threatening when you have a steady income may very well cause anxiety if you’re unemployed.
Talk to a financial advisor about your risk tolerance and any changes you feel necessary with your retirement plan. While a temporary pause in retirement contributions, for example, may make sense, you don’t want that decision to become permanent when you return to work.
Family Changes
Family changes such as caring for aging parents or adult children, having a baby, getting married, or becoming empty-nesters can all affect your risk tolerance. If you’re having a baby or getting married, you may want to direct your assets to save for the down payment on a house. If your kids have grown and moved away, you may want to downsize or change your insurance coverage.
Establishing a long-term relationship with a financial advisor can be extremely beneficial in times like these, as your financial advisor can help you adjust your plan based on what they know about you and your situation. Make sure to discuss any changes in your personal life, as they likely affect your financial life as well.
Age
Age is one of the primary determinants in a financial risk tolerance assessment. Young people can generally take more risks because they have more time to make up for losses. Once you’re retired, the loss can be much more difficult to make up, especially when you start living on your investments.
Age isn’t the only factor though. If you’re retiring early, your retirement money will need to last for more years.
Retirement
When you’re working, the purpose of investing is often to grow your assets. Once you enter retirement, the focus becomes preserving your assets to ensure you don’t outlive your money.
Reassess your risk tolerance 10 years before retirement, then five years before retirement, then again as you prepare to transition. Talk with a financial advisor about rebalancing your portfolio and reallocating assets as necessary to make sure that your glide into retirement is stable, comfortable, and within your risk tolerance parameters.
Reached a Financial Goal
Goals are the cornerstone of any financial plan. Reaching them can affect your risk tolerance.
Achievement of some goals can increase your risk tolerance. If you’ve been saving for a home down payment, for instance, you may have been putting a large part of your disposable income toward cash accounts. Once you buy a home, you may be able to divert some of that income toward investment and retirement accounts with stock and bond investments.
Achievement of other goals can decrease or stabilize your risk tolerance.
Talk to a financial advisor to make sure your plan stays relevant.
Goals/Outlook Changed
Has COVID-19 changed the way you feel about money? For many investors, 2020 was their first experience with market volatility. Were you able to remain calm and focused during market swings? Did you lose sleep at night, fearful of what the market would do to your investments? Talk with a financial advisor. Adjustments may not be necessary, but a discussion can help you understand your investment decisions.
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