One of the questions we\u2019ve had from clients during the prolonged bull market is: How often should I change my risk tolerance? The answer: Not often.<\/p>\n
Risk tolerance is the personal comfort level that an investor has with financial risk in the markets. In the most basic sense, it is your ability to stomach swings in the markets in exchange for potentially higher future returns. Risk tolerance doesn\u2019t tend to change dramatically over time. Consider the answer to this question: How would you respond to a 15 percent drop in your investments? Most people\u2019s reactions and levels of comfort in this situation would likely not vary over time.<\/p>\n
Risks Are Inherent When Investing in the Markets<\/strong><\/p>\n Investing is never without risk, and market ups and downs are a natural part of the investing journey. While risks in investing can never be eliminated, they can be managed. This is one of our main roles as advisors\u2014to act as risk managers. As risk managers, we have significant concern and care for preserving your capital and growing it over the longer term. We put this into practice when we construct and manage portfolios, positioning them so they are resilient in any one particular outcome, but also have the chance to do well across the many potential paths the markets can take.<\/p>\n During buoyant market periods, such as the recent extended bull market run, the need for risk management may not be overly apparent. It may have been easy to get caught up in the prevailing momentum. Yet, risk management does not focus on achieving the highest possible rates of return\u2014it is about preserving hard-earned capital to support investors in achieving the returns needed to accomplish their goals. Often, it\u2019s only when prices head downward that the value of risk management becomes more obvious.<\/p>\n This means following various guidelines that have been established to control risk. We do this in various ways, such as maintaining a strategic asset allocation, rebalancing portfolios back to target allocations when they drift too far, limiting the size of any particular holding, diversifying exposure across sectors and geographies, and paying particular attention to an investor\u2019s personal risk tolerance levels.<\/p>\n When Does Risk Tolerance Change?<\/strong><\/p>\n With time and evolving circumstances, however, your capacity to take on financial risk may change. This is your ability to withstand a financial shock, and it may have an impact on your risk tolerance. Here are events that may impact risk capacity:<\/p>\n