You might be familiar with this common investment advice: financial risk should be proportionate to the investor’s age. Typically, younger investors are able to make higher risk investments because they have time to recover from the natural dips and plateaus of the stock market. Although this piece of financial planning advice has been proven true more often than not, aggressive investors may belong to an older age group as well. Risk tolerance widely varies from one investor to another, regardless of age.
If you are wondering whether you might possess a high-risk tolerance, despite what you’ve been told about age and investments, a great place to start is by evaluating your personal finance as a whole with a trusted financial advisor. Together, you may assess other risk factors such as your investment portfolio and long-term financial goals, combined with the current market volatility.
In this article, we will discuss why risk tolerance is an important factor for both younger and older investors to evaluate prior to making any risky investments.
What is Risk Tolerance?
Risk tolerance is the degree of variability in investment returns than an investor is willing to withstand in their financial planning. A commonly accepted rule of risk tolerance is that those with time on their side generally have a higher risk tolerance; however, there are many other factors that determine any given investor’s risk tolerance.
For example, an 80-year-old individual who has saved wisely and is living comfortably in retirement is able to make high risk investments, because they are not relying on the investments to meet their basic needs. However, a 30-year-old individual with high student loans and an unstable income may not want to take high risks with their investments in order to quickly make enough money for a down payment on a house.
As you can see, both of these individuals should take into account their financial goals, current portfolio value, and the bigger picture of their financial stability.
Aggressive vs. Conservative Investors
Rather than being a true identifier of an investor’s income and age, risk tolerance involves more of a holistic view of an individual’s financial situation. How do you know which category you fall under? Consider whether you currently have a substantial safety net in place; this is generally a reliable indicator of whether or not you should make risky investments.
Remember, the stock and money markets are not the place to make fast cash—as you are running a marathon rather than sprinting to a nest egg. Some additional factors that you should take into consideration include the following:
- Your financial goals
- Investing timeline
- Age and life stage
- Portfolio size
- Personal comfort level
Another important note on commonly accepted investment rules: income does not directly correlate with risk tolerance. As we mentioned, debt and lifestyle expenses greatly impact an investor’s risk tolerance, which can widely differ from an individual’s income.
Calculated Risk
The bottom line is that smart investors do not invest on impulse or on trend; they take their time evaluating their entire personal financial situation with a financial advisor. They outline their financial goals with thought and a realistic approach. Although age and lifestyle situation deeply impact financial planning; they are not limiting factors.
Southwestern Investment Group provides financial planning services with expertise, helping empower you to take charge of your finances with confidence. Contact us today to learn more about risk tolerance and investment opportunity.
