Whether you are a green or a seasoned investor, completing a risk tolerance questionnaire is key to making sure you are investing in ways that align with your needs and goals throughout your lifetime.
The questionnaire considers factors like your current financial situation, age, investment time horizon and goals to determine your optimum portfolio and ensure your expected risk matches your expected return.
It is necessary to assess these factors prior to investing, but also periodically thereafter to make sure your money is always suitably invested and continuously working to serve your evolving needs.
Simply put, a risk questionnaire helps determine risk tolerance by way of a point system; the higher your score, the more aggressively you may be comfortable investing. Your age and time horizon also help determine your investment objectives. A young professional in their 20s or 30s, for example, may want to invest more aggressively for maximum growth because their portfolio will have ample time to weather market ups and downs and even continue to grow before they need to make withdrawals.
A senior approaching retirement, on the other hand, may be more interested in preserving their wealth and/or preparing to take a regular income. With increasing life expectancies and potentially longer retirements, a conservative portfolio may be better equipped to accommodate various possible scenarios later in life.
A suitable portfolio balances your unique investment horizon and risk tolerance at every successive life stage. Many individuals may have different risk tolerances depending on if the need for that particular investment is short- or long-term. for a short-term example, saving for a large purchase or education funds for children.
Although the emotions surrounding the market downturn are heightened due to COVID-19, now is a good time to check in with ourselves and reflect on our true feelings about risk. Some people are realizing that anticipating risk amid an 11 year up market is quite different from experiencing the outcome of that risk in a down market.
Be honest with yourself – are you feeling relatively comfortable about the movement in your portfolio or are you losing sleep over it?
Chances are, one or many circumstances have changed in your life since the beginning of 2020 and your investment portfolio may need to be realigned. If you feel like you may be invested in a portfolio that no longer reflects your current situation, there is no better time than now to discuss this with your advisor and (re)take a risk tolerance questionnaire. For help getting started on or modifying your investment portfolio, connect with us.