Investing

Welcome to Merit Money Matters.  Today we’re diving into risk tolerance to unlock valuable insights for aligning your investment accounts to your goals.

I’m Andreas Zoeller wealth manager and partner at Merit Financial Advisors, here to guide you through risk tolerance. By the end of this video, you will understand what risk tolerance means, the different levels of risk, and other factors to consider.

Our journey begins with understanding what risk tolerance means. Risk tolerance refers to the amount of loss an investor is prepared to handle when making an investment. This is important to understand because knowing what your aptitude for risk is will help you to properly set up your investment allocation from the beginning to avoid irrational decisions later on. Risk tolerance is the first step in determining how your portfolio should be constructed to reach your goals.

Here’s what it means for you. Before you can think about making an investment or what to invest in, you must first ask yourself how much loss are you willing to endure during volatility if your investment goes down. This can be a hard decision to make. So let’s look at different risk levels.

Conservative: you are willing to accept little to no volatility in your portfolio. Conservative investments may look like cash, CDs, and money market funds. A conservative investor may look like a retired individual who needs to start taking income from the portfolio, or a college student needing funds from a 529 plan.

Moderate: you want to grow your money without losing too much. Moderate investments may look like a mix of stocks and bonds, or what is referred to as a balanced portfolio. A moderate investor may look like an individual approaching retirement in three years, or a newly employed individual saving for a house.

Aggressive: you are willing to lose money to get potentially better results. Aggressive investments may look like stocks with a heavy emphasis on growth. An aggressive investor may look like a working individual with 25 years left until retirement, or a retired individual who will never need funds from their portfolio.

Other things to consider: what else should you consider when it comes to risk? It’s also important to note that your tolerance for risk is different than your ability to take a risk, and the two may not always match.

Your ability to take risk is dependent on things like your age and timeline. You may have the ability to take a lot of risk because the account won’t be used for years to come, but you may still not have the tolerance to take a lot of risk if volatility in your investments keeps you up at night. It’s important to understand the distinction so you can properly choose an investment plan.

How long until you need the funds in the investment account? Typically, a longer time horizon coincides with an ability to take more risk. Are these funds for you or for someone else Typically, next generation planning coincides with an ability to take more risk. Conversely, gifting to the next generation today may coincide the ability to take less risk.

To recap, today we’ve explored three pivotal insights: risk tolerance, risk levels, and other factors to consider. These principles aren’t just theories; they’re actionable strategies designed to understand how to invest properly a little better.

Join our online community by following us on social media and subscribing to our email newsletter. Thank you for joining Merit Money matters. I’m Andrea Zoeller and it’s been a

pleasure guiding you through this series. Please reach out to your Merit financial advisor to learn more. Don’t forget to check out other videos in the Merit Money Matters video series.