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Risk Tolerance & Investment

What is risk tolerance and how does it affect the investing process?

Financial advisory firms use some form of risk tolerance measure to guide the investment process. Risk tolerance can be defined in many ways, but we will use a simple definition for discussion purposes. Risk tolerance is a client’s ability and willingness to take market risk. As defined by Investopedia, "Market risk" is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known as undiversifiable risk because it affects all asset classes and is unpredictable.”

When discussing an individual’s risk tolerance, it is important to further define the ability and willingness aspect of the definition. The ability to take risk means that the client has the financial resources and the appropriate timeframe to bear the up and down movement of a portfolio due to market risk. As the old adage goes “a person should never invest more money than they can stand to lose.” The willingness to take risk means that the client understands the potential movements of the market and how this can affect their investment portfolio and knowingly invests armed with that knowledge.

The investing process is all about balancing risk with the potential return/growth that can be gained from investing. Seraphim Wealth Advisors provides detailed education to its clients that allows them to make educated decisions about their financial future. Each person has a unique risk profile that should be used to build a suitable portfolio. Do you know your investing risk tolerance? Visit us at SeraphimWealth.com to learn more about investing and what’s suitable for you.

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