Understanding Your Risk Tolerance
Despite their best intentions individual investors often allow their emotions to cloud their judgment, which can derail their long-term investment goals.
When equity markets are rising, investors often feel the excitement and are inclined to bulk up on stock holdings as well as other risky investments within their portfolios. When the market eventually pulls back, fear sets in and investors are inclined to sell which locks in losses. After being burned in the market, investors often sit out on the sidelines and wait until the market “feels safe” again. By doing so they often miss out on the majority of the recovery only to jump back into the equity market when the market is near its high, only to have this cycle repeat all over again.
How can investors break this cycle of buying high and selling low?
By creating a well-diversified investment portfolio that is within the boundary of their personal risk tolerance, investors are well positioned to remain invested throughout turmoil in financial markets, which enables them to remain on course to fulfill their long-term investment goals.
After pinpointing what level of volatility an individual investor is able to tolerate an analysis can be conducted to determine if their current investment portfolio is invested within their personal comfort zone and a personalized asset allocation can be constructed that aligns their comfort level to the expected volatility of the investment portfolio.
Take the first step to ensure that you are investing within your comfort zone by completing this online risk tolerance questionnaire: