Ranking Your Risk Tolerance is Important – Tips and Questions to Ask

 

One of the key considerations financial advisors use when suggesting investments for clients is what their “risk tolerance” is.  While it probably isn’t a term you think about every day, it’s worth considering what your own risk tolerance is to see if you’re taking the right risks in life with respect to everything from renting vs. owning a flat to investing to career choices.  Here are some factors worth considering:

 

  • Living Situation – Renting is generally considered to be a much lower risk proposition than buying your own place.  Why?  It’s much more flexible and requires very little money to start. In a world where things can change quickly, like jobs or family situations, owning a place is usually best for very stable situations with a high level predictability.

 

  • Investing – There are a few key types of investments that most people focus on ranging from ISAs to bonds to stocks.  Generally, the “risk level” increases in that order.  While your money is generally considered to be safe and stable in an ISA, the returns are not very high, often actually losing out to inflation.  In bonds, the returns are generally a bit higher, but bond values can decrease in value.  Finally, stocks tend to have the highest returns over long periods of time, but during any given year, they’re quite volatile, meaning you could gain or lose quite a bit in any given period.  Therefore, if the thought of losing money in your investments keeps you up at night, your allocation to stocks should be quite low.

 

  • Career – There are different career choices people make depending on their risk tolerance.  As an example, for someone who’s young and single and isn’t tied to a particular area, they may be more aggressive with seeking more employment opportunities more often, jumping employers for more money and promotions.  On the other hand, someone with a large family and approaching retirement may not be as apt to switch jobs or take risky career directional changes.  Much depends on your professional ambitions, whether you have a second source of income and how strong jobs are in your field.

 

 

We often think about risk in terms of whether to cross the road with a car approaching or whether to gamble or things along those lines, but not always in financial and career terms.  Hopefully, the concepts laid out here will help you understand where you stand on the risk spectrum and help in your decision-making.

About 

Darwin is an engineer and MBA who takes an "evolutionary" approach to finance, writing about adapting to evolving financial management, tax, investing, and savings opportunities. Making more money and saving more money is an adaptive process - join the evolution! He blogs at Darwin's Money and ETF Base.
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