Consider Emotions when Assessing Risk Tolerance
Many see risk tolerance as a simple measure of their financial ability to withstand market losses. While there are many financial factors to consider (including income, net worth, liquidity, and time horizon), the emotional component of managing risk can’t be underestimated.
Emotions are powerful enough to override logic and drive people to decisions that may not be aligned with their overall wealth management plan. Stock market volatility, a bear market, and creeping inflation rates can take a severe toll on the average investor’s psyche. For some, it can significantly alter how they perceive and manage risk.
Recognizing that emotions like fear and exuberance are reactionary mechanisms that tend to flare up over short-term events may keep you in check when examining risk tolerance in the context of your long-term strategy. If the plan is well-balanced, diversified, and managed through proper rebalancing for evolving risk tolerance, short-term market events (and the emotions associated with them) may have less impact.
Understanding your overall risk tolerance is one important step in creating a sound wealth management plan. A Cranbrook Wealth investment professional can help you determine a level of risk that’s suitable for you and your goals, including use of Riskalyze, an adaptive, objective risk tolerance platform. To begin building your wealth management strategy, including a risk tolerance assessment, contact a Cranbrook Wealth investment professional.