"Spring Cleaning" - A Great Time to Reassess Your Risk Tolerance
Spring time brings about a sense of renewal and change. Everything comes back to life after a long hibernation. As we embrace this new season, perhaps it is a good time to reassess your financial health and ways to spark new growth or change. Considering this Winter’s slightly tumultuous ride on Wall Street, this Spring may be a good time to re-evaluate your Risk Tolerance.
Often times, we are asked “How often should I reassess my Risk Tolerance?” Risk tolerance is a unique factor that quantifies how an individual feels about the amount of risk they are willing to take in relation to the amount of financial potential. It should be determined using more than just a general questionnaire – it should be a thought-provoking process. There are many factors that come into play in determining this number – some are very personal (emotions, history, background) and some are more tangible (market performance, political landscape, global view). ALL of these factors can determine the comfort zone for each individual investor. Beyond those factors, there are different times in your life when you should take a look and re-evaluate your risk tolerance to ensure that it is in line with your goals.
There are right and wrong reasons to change your Risk Tolerance and this may be a good time to weigh all of the factors that influence it.
One of the best reasons to alter your Risk Tolerance is due to significant financial changes:
- Have you experienced a major life change? (marriage, divorce, job loss, death of loved one, inheritance, financial responsibility for an aging parent)
- Have you had a significant increase or decrease in your liquid net worth?
- Have you had a significant increase or decrease in your income?
Another good reason to reassess your risk tolerance is the years you have to retirement. As you near retirement, you need to evaluate that your risk tolerance and your risk capacity are in line with your financial goals.
Avoid the reliance of Market Timing as a re-evaluating factor. Changing your risk tolerance in reaction to market performance is a form of market timing. No one knows the future and trying to predict the future of the market is as risky as putting it all on a number in roulette. Long-term diversified investing is the best way to see steady overall gains, even with the periodic market down turns. The market will have upturns and downturns, but your overall risk tolerance should remain about the same regardless of these fluctuations.
“Slow and steady” generally wins in the long run when it comes to investing.
And just like the new Spring blossoms, your investments can grow and flourish with some time and attention.