Understanding your risk tolerance is a crucial aspect of how effective your income and wealth preservation strategy can be. Without knowing your risk tolerance, you could be leaving a lot on the table or risking a major decline in your wealth. Here are three questions to ask to start understanding your risk tolerance:
1) How Many Years Until You Plan to Start Withdrawing?
- Is it less than a year? A few years? More than 15? The time frame for when you will need the money is key to understanding your risk tolerance.
2) What’s More Important, Portfolio Protection or High Returns?
- Are you willing to take the consequences of a loss to maximize returns? Are you concerned about losses as well as maximizing returns? Or are you more concerned about avoiding losses no matter what?
- Your answer to these questions is also one of the most important factors when it comes to choosing what assets your wealth should be invested in.
3) What Are Your Annual Income Expectations Prior to Retirement?
- Are you expecting your income to stay the same, increase, increase a lot, decrease, or decrease a lot?
- Understanding your income level is another key piece to finding out what you can afford to risk achieving the returns you hope for.
- It also helps you better understand how much income you should expect to replace.
Answering these questions only scratches the surface of understanding your risk tolerance, but it’s a great way to get the ball rolling whether you’re looking to re-balance your portfolio or are constructing your retirement investment strategy.