Risk Tolerance: Stress-Test Your Portfolio…and Yourself

Many market shocks, such as the downturn at the end of 2018, are short-lived once investors conclude that the economy is on solid footing.

Still, major market plunges such as the 2000 dot-com bust and the 2008–09 credit crisis are powerful reminders that we cannot control or predict exactly how, where, or when precarious situations will arise.

This week, Craig Siminski, of CMS Retirement Income Planning, shares information on testing your risk tolerance:

Market risk refers to the possibility that an investment will lose value because of a broad decline in the financial markets, which can be the result of economic or sociopolitical factors.

 All stocks are exposed to market risk. Investors who accept more risk by keeping a large portion of their portfolios in stocks may benefit from higher returns in the good times, but they get hit harder during the bad times. A more conservative portfolio, with a smaller percentage of stocks, is generally less volatile but has lower potential for gain during market upswings.

Your portfolio’s risk profile should reflect your ability to endure periods of market volatility, both financially and emotionally. Here are some questions that may help you evaluate your personal tolerance for risk:

How much risk can you handle financially?

Your capacity for risk generally depends on your current financial position (income, assets, and expenses) as well as your age, health, future earning potential, and time horizon. Your time horizon is the length of time before you expect to …

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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