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5 Steps to Determining Your Risk Tolerance

There’s a degree of risk in any financial investment. Whether or not you decide to invest your money in a particular investment often hinges on your risk tolerance. You can think of risk tolerance not only as how much you are willing to lose on your investments, but also how much uncertainty you can live with from day to day.

Are you the type that sits and watches the stock ticker pass by all day? If so, does it fill you with dread or excitement? Or are you a 'buy it and forget about it' kind of investor? These are the kinds of questions you should be asking yourself. The answers will, in turn, help you pick out an investment portfolio that’s right for you.

Here are some tips to help you think about your risk tolerance.

1. Take a Personality Test

The individual identity component of risk tolerance assessment shouldn’t be ignored. Some of your risk tolerance can be measured, meaning that the amount of risk you can tolerate is based on factors like your age or your income. However, you may simply not like making risky investments. That’s okay. You should be comfortable with saving and investing your money the way you like. A personality test is a good place to start.

2. Determine Your Financial Goals

Are you saving for a car or setting yourself up for retirement? Are you investing for growth or preservation? These questions help you determine an acceptable level of risk tolerance. For instance, growth seeking investors would generally take on more risk than investors seeking to preserve their assets. 

3. Know Your Time Horizon

If you’re relatively young, you have plenty of time to ride out the peaks and valleys of the economy. You can tolerate a little more risk by design. If you have a goal you need to meet quickly (buying a home) or you are nearing retirement age, you may want to think more conservatively so that you don’t lose too much money. Generally, the longer the time-horizon, the more risk is acceptable to take on.

4. Consider Your Wealth and Income

Strong, stable earners can take on more risk generally than modest or stagnant earners. Additional factors that should be considered are net worth (what you own minus what you owe) and the amount of debt you’re carrying. 

5. Seek Advice

Consider seeking professional guidance. Working with a financial planner can reveal clues about your risk tolerance and help you map out a strategy. You may find that you are not as risk averse or risk tolerant as you thought.

Sonoma Wealth Advisors is a registered investment adviser and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.  The information presented is for educational purposes and believed to be factual, but we do not guarantee its accuracy and it should not be regarded as a complete analysis. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice. An investment adviser representative should be consulted directly before implementing any investment strategy. Investments are subject to market risks and the potential loss of the entire principal amount invested. Past performance is no guarantee of future results.

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