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Investing is truly dynamic, and generally speaking, investment patterns tend to vary depending on how close you may be to retirement. One of the biggest questions we see being asked is, "How much money do I need to save for retirement?” And while it would be nice to give a simple figure to go off, the truth of the matter is it really depends, and there is no one-size-fits-all solution. A big factor that you must individually consider when saving for retirement is how tolerant or averse you are to risk in your portfolio. The word “risk” itself often carries negative connotations, but what does it really mean in investing, and how does it factor into retirement plans?  What Does Risk Tolerance Mean?
Boiled down to the fundamentals, risk is at the very heart of finance and investing. With no risk, there would be no stock market or purpose for investment. Risk tolerance simply refers to how you feel personally about investment risks, or put otherwise, how much you’re willing to risk taking losses. We naturally want to see our investment portfolio increase, not decrease. A little risk often means little potential gains but smaller potential losses. Big risk means potentially huge gains at the expense of potentially losing it all. If you’re highly risk-tolerant, it means you’re willing to invest in instruments that often have high yields, but you’ve accepted that it could also mean losing it all or a significant amount. If you’re risk-averse, it means you’re happier with lower yields and not too willing to lose very much. What Shapes Your Risk Level? As one approaches retirement age, and ideally long before that, tolerance/aversion to risk remain some of the most important considerations. If you’re in your 20s or 30s, you have a much longer time horizon before retirement. That means there’s more time to see your assets grow, even if incrementally. Compound interest is incredibly powerful, as Einstein famously stated! As you approach retirement age, say in your 50s and 60s, that window closes, and you no longer benefit from time in the market (if you’ve neglected meaningful investing until then). What this often means is that as you’re young, you can afford riskier investments since you still have many working years to make up for any losses. Those losses are simply unbearable if you’re older and can’t afford them. What Are the Most Common Risk Profiles? Investors are often categorised depending on their risk profile. This helps put together a robust portfolio that matches their tolerance/aversion to risk and that optimises potential yields within each category. Generally, we refer to conservative investors as those who prioritise preserving their capital, minimising volatility, and not taking too big a risk overall. Government bonds, “blue chip” stocks, and index funds are often considered quite safe and conservative. A growth risk profile tends to favour long-term growth with riskier stocks and other assets at the expense of having more volatility introduced and therefore a higher risk. A balanced profile naturally incorporates some of both of these, “smoothing” out a little volatility but still having a little risk and thus higher potential gains. What’s the Best Risk Profile for You? Everyone has different goals when it comes to retirement, as well as different tolerances to risk. There’s no best solution for one group or another, but there are best solutions for your circumstances. A risk profile can help you figure out how willing you are to make certain investments, and it can be a lot less stressful than throwing your hard-earned money into the market and hoping for the best. To find out what the best investment portfolio is for your retirement, it’s best to consult with a professional wealth management firm such as Davlin. Davlin Wealth Management Save for retirement and more with Davlin Wealth Management in Sydney. Comments are closed.
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