Stock market volatility is back. But hasn’t it always been here? In short, yes.

The last true recession we saw was during the pandemic, causing a downturn throughout a period of major market volatility. While it seems much steadier lately as we continue through a bull market, we’re still dealing with near-constant ups and downs. And you’ll see them, even if you’re not looking at your portfolio’s performance every day. So, how can you handle your investment portfolio’s risk through constant market changes?

You possibly already are. 

What Is Risk Tolerance?

But how are you already handling your portfolio’s risk? Your risk tolerance. First of all, financial risk comes in many forms: Credit, inflation, liquidity, legal and regulatory, interest rate, currency, operational, political … I could go on. With so many types of risk in the financial landscape, how do you determine your risk tolerance, and how does it differ from risk itself?

When I talk about risk in direct relation to investment planning, I’m honing in on a different type of risk: market risk. That is, the risk of losses in the stock market. Your risk tolerance is how much of that risk you’re willing to take with the portfolio that you’re investing in the market. Put slightly differently, it’s the objective amount of risk you can stomach as you use your portfolio to combat the market risks over which you have no control. You can think of it as the amount of downside you’re willing to potentially experience for the possibility of achieving a certain amount of upside. 

And remember the age-old mantra: Control what you can control. Your risk tolerance allows for a range of outcomes. In that range are the lowest lows you’re comfortable with seeing to potentially reach the highest highs that also exist within that range. In any given amount of time, you could see both. You wouldn’t have to jump to change your investments if you saw your own lowest lows, because you already know that you’re comfortable with them. 

Now that we’re clear on what risk tolerance is, let’s get into how you can find out what yours is — or should be.

Remember That Risk Assessment?

If you’re a new client who hasn’t met with Reg for your strategy consultation yet, you probably haven’t taken a risk assessment yet, either. But if you have or if we’ve been working together for a while, you should at least know what it is. It’s a set of 10 questions that you answer through your RightCapital to help us gauge your investment risk tolerance. 

Your risk tolerance assessment asks you questions about market environments both good and bad. We also factor in your time horizon, or when you’ll be using your invested dollars, and use it all to identify your target asset allocation. We then build it into a tax-optimized asset location by account type. 

How? In addition to honoring both your preferences and your timeline, we also balance the investments’ locations among in your taxable, tax-free, and pre-tax accounts. The goal of an appropriate tax-location-optimized asset allocation is to help you avoid the downside you’re not willing to take while allowing you to see as much of the upside of market increases as possible within your comfort-zone range.

Haven’t seen all too much downside lately? Volatile years with stock market losses are certainly nothing out of the ordinary. Historically speaking, the last few years have been rare because we haven’t seen much volatility. This mellow stretch in the markets led to some investors getting overconfident and believing that the market always goes up. But what goes up must also come down.

And you’re already prepared. Your risk assessment helped us to understand how much downside risk you’re willing to take on, remember? We’ll continue to check in on your risk tolerance during annual investment planning consultations and adjust as necessary. 

Want to Revisit Your Risk Tolerance?

We determined goals for your investment account as well as your time horizon and your risk tolerance when we began working together. But this was just one step in your investment journey! 

If you’d like to revisit your approach, get in touch. It’s investment planning month, meaning it’s the perfect time for you to complete a fresh risk assessment and for us to get together to discuss your results. Then, we can determine if a change in your risk tolerance indicates a meaningful and permanent difference in your appetite to take on risk.