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Measuring Your Ability to Handle Investment Risk

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Investing can challenge anyone.  When you see your account values decrease, it creates a level of discomfort.  But how do you know your breaking point?  Financial Advisors have been using Risk Tolerance Questionnaires for decades, as do we.  They range from extremely simple to more elaborate, and all have some basic limitations.  Today we discuss measuring your ability to handle investment risk.

Watch Now:  Measuring Your Ability to Handle Investment Risk

  • 0:00 - Intro
  • 0:29 - Welcome
  • 0:46 - Understanding Risk Capacity
  • 1:59 - Tolerating Pain
  • 3:58 - How well do you handle stress?
  • 5:20 - Limitations of Risk Questionnaires
  • 8:05 - Understanding what is under the hood of risk assessment tools.
  • 11:15 - Outro

Measuring Your Ability to Handle Investment Risk

We have a new tool to help measure your ability to handle investment risk.  It is called Hidden Levers.  We believe it is the most complete way to measure this for you.  As we meet with you in the coming months, we will be going through this tool with you.  But you don't have to wait.  You can take the assessment now.  Once you complete your advisor will reach out to you to discuss the results.

Get Your Risk Score

The Components of Risk: Risk Capacity

Risk Capacity is the way most financial advisors will define risk.  It considers key elements like your time frame, your age, your need for income, your overall investment knowledge, and other non-emotional aspects of risk.  The capacity of a 30-year-old will differ from a 55-year-old or a 75-year-old.  An extremely knowledgeable and experienced investor will have a different level of risk than a newer investor.  All of it matters.

The Components of Risk:  Risk Tolerance

Think of this as your pain threshold.  Everyone handles physical pain differently.  The same is true for the emotional discomfort felt by investors.  Some people can withstand major decreases in value before they get nervous.  Others tolerate very little.  Risk Tolerance is the limit you have before you want to bail out of those positions.  

The Components of Risk: Your Composure

Years ago, we weren't bombarded with news and information about what was happening in the world.  You might not have known what the investment markets were doing at all unless you went looking for the numbers.  Today, the pace and flow of information—about everything—is exponentially greater.  That creates challenges for all of us. 

Your composure is a personality test of sorts.  It measures how you believe you react to those stressors.  How well do you keep your cool?  

A Snapshot in time...

Most risk assessments are a snapshot in time.  The answers you give will reflect both what is happening in your own life—getting older, retiring, losing a spouse.  It will also reflect what is happening in the world around us—the midst of a bear market, a pending recession, general news of doom and gloom.  Like anything, these assessments should be done periodically.  

Limitations...

All risk assessment tools face the same limitations.  They are all based on historical data.  There is an old adage, history rarely repeats itself, but it often rhymes.  Strange and unpredictable things will always happen.  For example, this is the first time since 1969, both stocks and bonds decreased in the same calendar year.

None of these tools will help you and your advisor avoid an uncomfortable period.  But it will help you and your advisor make better decisions about the overall construction and allocation of your investments.  

Measuring Your Ability to Handle Investment Risk

We have a new tool to help measure your ability to handle investment risk.  It is called Hidden Levers.  We believe it is the most complete way to measure this for you.  As we meet with you in the coming months, we will be going through this tool with you.  But you don't have to wait.  You can take the assessment now.  Once you complete your advisor will reach out to you to discuss the results.

Get Your Risk Score

Appearing in this Video


Todd Kimpel, CLU®, ChFC®

Todd is a Financial Advisor in Wheeling, West Virginia

Julie Daley, RICP®

Julie is a Financial Advisor in St. Clairsville, Ohio

Neal Watson, CFP®

Neal is a Financial Advisor in Marietta, Ohio.