Do you know your true risk tolerance?


David Joy, Chief Market Strategist – Ameriprise Financial

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Key Points

  • Understanding your risk tolerance level is a critical part of sticking with a diversified investment portfolio.
  • Traditional methods to determine your appetite for risk can fall short.
  • Ameriprise has developed an approach that enables your financial advisor and you to more precisely gauge your comfort level with market risk.

The ability to accurately identify risk tolerance is one of the foundational underpinnings of a well-designed investment portfolio.

Higher risk offers the potential for higher returns, but only when you stay invested over time. If you lose your confidence during a down market and move to cash, you could miss an eventual recovery in stock prices. Knowing your risk tolerance can help you avoid that mistake.

Typically, the process of identifying risk tolerance has involved answering questions about your financial goals, investment objective and attitude toward market fluctuations. The purpose is to reveal where you are on the risk spectrum, ranging from conservative to aggressive. Your Ameriprise advisor factors that into the personalized investment recommendations they provide to you.

The need for honest self-assessment

Ancient Greek philosophers exhorted students to “know thyself.” Investors should do the same. With support from your financial advisor, consider your hopes and fears, motivations and aspirations. Those factors might impact your attitude toward investment gains and losses, risks and rewards. This is a cornerstone principle of behavioral economics, which reminds us that we are human, not the rational actors that traditional economic models have assumed.

By assessing your risk tolerance level with your advisor, you are less likely to abandon a thoughtful investment plan during a market selloff or take on excessive risk during a bull market. Unless you have a life-altering event or your financial goals change, you should anchor to a long-term portfolio. This requires only minor adjustments from time to time.

Personalized investment recommendations from your advisor

Ameriprise Financial has developed a new tool to make the process of identifying your risk tolerance more interactive and intuitive. It uses a series of real, historical market scenarios to illustrate the portfolio impact, in both percentage and dollar terms.

You will gain greater insight into how specific changes in future markets are likely to impact your portfolio. In our view, this will lead to greater precision in defining what it means to be a conservative or aggressive investor, or somewhere in between.

To learn more about risk tolerance and the role it plays a sound portfolio, or if you have questions about your own profile, please speak with your Ameriprise financial advisor.