Financial Planning

Risk Tolerance and Down Markets

By October 2, 2022 No Comments

Our ability to manage risk in a healthy and productive way is something that is innate to some and difficult for others. Whether referring to financial risk, investment risk, relationship risks, or maybe bungy jumping off a building in Vegas risks (no thank you…), understanding how much risk you want to endure will help you lead your life to the fullest.

Given the current bear market, “investment risk” seems to be a hot topic of conversation. It is difficult to fully understand market risk until you have experienced the roller coaster that sometimes saving for retirement or other goals can be.

At LW Advisors, we believe risk is multi-dimensional. Here are a few aspects that we believe are most important to understand as markets seem to continue to lose value:

  1. Risk Perception – Unlike the factors of risk below, risk perception is an indicator of how you feel about investing in stocks at a specific time. Risk perception is very difficult to nail down. Sometimes it will change after a conversation with a friend or financial advisor. Often times our risk perception is distorted – for instance thinking stocks have less risk when the market goes up and down.
  2. Risk Capacity – This refers to your ability to take on investment risk and will change slowly throughout your lifetime. When it comes to retirement investments (which isn’t the only goal!), the younger you are the more risk capacity you may have.
  3. Risk Tolerance – Risk tolerance refers to you as a person and how much risk you are comfortable taking. This may vary from activity to activity, for instance someone may have a very low tolerance when it comes to investment fluctuation, but is perfectly fine riding a bike without a helmet (again, no thank you)!

Managing risk in your investment portfolio sets you off on the right foot for success. Knowing your goals and values helps you navigate through the difficult decisions that will occur as times get tough. Plans will always change, but that doesn’t take away from the fact that without a plan for the thick and thin, life may be a little harder than it needs to be.
We are called financial advisors, but we believe so much of value is in risk management. Whether you are looking for a one-time plan or investment management services, reach out here to start a conversation.

Investment advisory services offered through LW Advisors L.L.C., a Registered Investment Advisor in the state of Iowa.