Understand Your Risk Tolerance

All investments come with some amount of risk – the possibility of losing some or all of the money you have invested. There’s no such thing as a high return, risk-free investment. Generally, if you want higher returns, you should be prepared to accept the higher risk that goes along with them. 

All investors want to earn returns on their investment – but it is important to understand your risk tolerance. Your risk tolerance is a measure of how much risk you are willing and able to take with your investments. Investment risk is a measure of how much the current price of an investment varies from its average price. An investment that has a price that varies a lot and quickly is considered riskier than one that stays relatively consistent over time. Your ability to tolerate risk (your financial risk tolerance) is a consideration of how a loss would impact your standard of living. Can you afford the risk your investments carry and are you able to generate income to make up for a potential loss?

Your willingness to take on risk (your psychological risk tolerance) is the emotional side of the equation. Does the amount of risk your investments carry cause you stress or make you uncomfortable? It is easy to over-estimate our willingness to take on risk, so to help answer this question, think about the last time you dealt with a financial loss. If it was hard to accept or caused you emotional distress, consider how to adjust your investment risk tolerance. 

Your risk tolerance can also shift over time depending on your personal and financial circumstances. Be sure to re-evaluate your risk tolerance from time to time, particularly in the face of important life changes such as getting married, changing employment, having a child or planning your retirement.

Your advisor can help you choose investments that will both help you achieve your goals and stay within your risk tolerance.

Review our 9 Types of Investment Risk – A Guide for New Brunswick Investors to learn what kind of risks you may be exposed to.