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Understanding Your Risk Tolerance: 5 Easy Steps - Infographic Thumbnail

Understanding Your Risk Tolerance: 5 Easy Steps - Infographic

Investing

Everything we do has an element of risk to it. Even getting in the car and going to the grocery store is a risk (and more-so in Covid times), yet we go anyways because getting groceries is worth the risk, and we do what we can to limit the risks. The same process exists in investing. You can take steps to understand how much risk is reasonable for you and to limit those risks.  

A few further thoughts:

Step 3a: Remember that your time horizon is relative to each event in your life. So you might be 20 years from retirement, but retirement isn't the only thing that matters. Are you going to buy another property? When? Are you sending your kids to university, or helping them with a down payment on their first house? Are you going to need cash for a renovation or a major purchase? It's helpful to plan out your large expenses over a long time and adjust your time horizon based on how much money you'll need in the short term, mid term, and long term.

Step 4a: Think about how you've responded to risk in the past. How did you handle your investments in 2008? How stressful was March of 2020 when the Covid crash happened and markets plummeted the fastest in history? If you were uncomfortable or were tempted to respond by getting out of the markets or sitting on the sidelines then your investments were too risky. Your risk tolerance shouldn't change when markets move. Hypotheticals aren't nearly as valuable as your actual responses in the past.

Step 5a: A financial planner can help you manage those bigger expenses over longer time horizons. Humans are notoriously terrible at estimating what the future might look like; we live in the present. What will our lives look like in 20 years? How will that be improved if I save a little more  money? We have no idea. So financial planning is an important way to understand the long term consequences of your short term decisions. After all, future-you is going to need money too, don't leave yourself in a lurch.  

This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.