Risk Tolerance.

Have you ever wondered why some investors are more willing to take risks with their investments while others prefer a more balanced approach? The answer resides in their risk tolerance, a crucial factor in determining how their investment portfolio is managed.

Risk Tolerance is defined as the degree of uncertainty an investor can handle when it comes to potential losses in their investment portfolio. It is influenced by a variety of factors, including financial stability, investment knowledge and experience, time horizon, personal temperament, age, and behavioral finance. Understanding your risk tolerance is essential to make informed decisions about your investment strategies. When it comes to investing there is a direct correlation between risk and reward.  Typically, the higher the risk you are willing to take, the higher the potential reward. However, it is important to remember that higher risk also means a greater chance of losing money.

Behavioral finance plays a significant role in determining one’s risk tolerance. This field of study combines psychology and economics to analyze and understand how individuals make financial decisions. Our behavior and emotions can greatly impact our risk tolerance and investment decisions. For example, fear of losing money during a market downturn may cause some investors to panic and sell their investments at a loss. In contrast, overconfidence may lead others to take excessive risks. The days of assessing risk by using terms like aggressive, moderate, and conservative are long behind us. In general, these terms are hard to define, overused, and are subjected to harsh stereotypes based primarily on age. To effectively manage your risk tolerance, it is important to be aware of your emotions and biases when making investment decisions.

At Ecos Wealth Advisors our Risk Tolerance approach utilizes a “Risk Number”, a quantitative way to pinpoint how much risk you want, how much risk you currently have in your investment portfolio, and how much risk you need to take to reach your long-term financial goals. In addition to evaluating your overall financial situation, financial goals, time horizon, and financial obligations, we review and encourage you to review the potential downside risk and upside potential of your investment portfolio. The Risk Number falls on a number scale of 1 to 99, which employs both risk tolerance and behavioral finance to find a number that is suitable for your financial needs.
Think of it like a speed limit on your investment portfolio, set by you, and monitored by your advisor. Every once in a while, we can take our foot off the gas slightly if there are bumps in the road ahead of us, but we want to adhere to the Risk Number.

With guidance and ongoing monitoring of your risk tolerance and investment portfolio, you are more likely to stick with a well-thought-out long-term investment strategy that allows you to feel confident investing, even in times of uncertainty.

Remember, investing always involves some level of risk, but by being aware of your risk tolerance and making informed decisions, you can maximize your long-term investment returns.