When you started out investing, you thoughtfully identified a risk tolerance that made sense with your investment plan. Even if that plan has served your goals well, as you approach the time when you'll be using your money much more than investing it, it's wise to consider if your current risk tolerance is still right for you.
Here's what happens to your risk tolerance over time and when to reevaluate it with a financial advisor.
What happens to your risk tolerance over time
As you get closer to needing your money, a large market dip can devastate your financial goals. Lowering your risk tolerance by shifting to more conservative assets, like
When to consider adjusting your investment risk tolerance
Some events in life can leave you reconsidering how much money you're comfortable losing in the market. In those cases, you may want to revisit your portfolio and reevaluate your risk tolerance. Here are some, but not all, situations to consider.
- Nearing retirement. As you get closer to retirement, you'll want a less risky investment portfolio to protect your money. That way, you may be less worried about a
bear marketwiping out money you need to access in the short term.
- Family changes. Getting married or welcoming a new child or grandchild to the family could change your long-term goals and impact how much risk you're willing to take on. Similarly, losing a close loved one—especially one who contributed significantly financially—could change your investment timeline. This could warrant reevaluating your investment strategy and tolerance level.
- Losing a job. Losing your job, especially if you're close to retirement, can leave you wondering if you're comfortable with your current level of investment risk. It wouldn't hurt to look at your risk tolerance since major shifts in income over the long term can change your savings goals or expectations.
- Changes in long-term health care needs. When you initially began investing, you may have expected a healthy retirement. But, if changes to your health require
higher than average medical costs, you may need more money in retirement than you originally planned. This major shift in your financial goals could change how much you can stand to lose, making it an opportune time to review and realign your risk tolerance level.
- Receiving an inheritance. While the above situations may cause someone to seek a more conservative portfolio, a large infusion of cash could mean you have a larger financial cushion that allows you to take greater risks with your investment portfolio.
What is your investing style?
How much investment risk can you take?
Reevaluating your risk tolerance doesn't have to be complicated. If you experience a life or market event that warrants a change, here are a few questions to consider, ideally with your financial advisor.
- Can I recover from a potential downside financially?
Volatile marketsare a given. What's more important is your capacity to rebound financially. Of course, the more time your money has to sit in the market, the greater your potential to recover from even the largest dips. But if you're approaching retirement, you have less time to recover from a loss and might consider adjusting your risk tolerance.
- Can I recover from a potential downside emotionally? Reevaluating your risk tolerance is not solely about the numbers. Your comfort level matters. The more comfortable you are with your investment strategy, the more likely you are to remain calm through the market's ups and downs and make financial decisions that work best for you and your family. If you can no longer stomach your current risk level, think about reevaluating it with your financial advisor.
- Do I have the right support for my investment plan? Part of ensuring you can rebound financially and emotionally from a market downside is having the right support and guidance for your investment strategy. For example, if you are uncomfortable with market volatility but still want the potential gain of long-term investments, you and your financial advisor may agree to review your portfolio performance less frequently.
Get professional guidance on your investment plan
Your investment strategy doesn't have to keep you up at night. If any life event has you reconsidering how much you're willing to lose, it's worth reviewing and reevaluating your risk tolerance.
Meet with your