Risk tolerance — How do you really feel about risk?

Some people love taking big risks. They get a thrill out of storms that rock the boat. Others avoid risk at all costs. They only want to drift in perfectly calm waters. Most of us fall somewhere in the middle, and when it comes to retirement investing, it’s probably good to be somewhere between those two extremes.

Get personal with your risk personality

Every investment decision you make involves dealing with some kind of risk. So it’s a good idea to be honest about your risk personality. Where do you fall in that vast middle ground between wild and mild? Do you lean more towards playing it safe or are you okay with sometimes going a little further out on the edge? Knowing where you fall on the risk tolerance scale can help you make more informed investment decisions.

Your tolerance for risk goes beyond your personality. It’s also driven by:

• Your time horizon — The more time you can stay invested before you need to withdraw your investment the more you can focus on growth. Although past performance is no guarantee of future results, historically, stocks have provided the best growth potential over the long term. Stocks carry higher market risk (the risk of your investments losing value) but with a long time horizon, you may be able to make up for any losses.
• Your retirement income goals — If you’re planning on living a very long, healthy life and traveling the world during retirement, you need to accumulate more money — which, besides saving more money, could mean accepting more risk — than if you plan to sit in a rocking chair on your front porch.
• Your objective — What are your goals for the account?
  • Capital preservation: My primary investment objective is capital preservation. I am a conservative investor. My risk tolerance is very low. I seek to preserve my capital and am not willing to accept risk to my capital in order to grow my portfolio. I am willing to accept lower returns to preserve my portfolio and capital.
  • Income: My primary investment objective is income. I am a moderately conservative investor. My risk tolerance is low to moderate. I seek income, but am willing to accept minimal risk to my capital in order to grow my portfolio.
  • Growth and income: My primary investment objective is growth and income. I am a moderate investor who seeks both growth and income. I am willing to accept some risk, fluctuation and losses to my capital in order to grow my portfolio.
  • Growth: My primary investment objective is growth. I am a moderately aggressive investor who seeks to grow my portfolio. I am willing to accept more risk, fluctuation and losses to my capital in order to grow my portfolio.
  • Aggressive growth: My primary investment objective is aggressive growth. I am an aggressive investor who seeks to aggressively grow my portfolio. I am willing to accept higher risk, fluctuation and losses to my capital in order to aggressively grow my portfolio.

Make it a good fit

There’s no right or wrong risk strategy. First, understand your risk profile, then find a balance between the returns you need to work toward your goals and the level of risk you’re comfortable with. You can always loosen things up if your risk tolerance feels like it’s cinched a little too tight or tighten the reins if you're not comfortable with your current level of risk.