HELP & SUPPORT LOCATIONS CONTACT US LOGIN Our Solutions Who We Serve Insights About Us Search Assessing Your Risk Tolerance Carol Benjamin, CFA Vice President, Senior Client Portfolio Manager September 28, 2020 INVESTING & ECONOMY Share Time to re-evaluate your financial future? Our wealth management professionals can help. Learn More . Get in touch For more information about our wealth management services, call 844-251-0099 Email Us Home Insights Investing & Economy Assessing Your Risk Tolerance The COVID-19 induced lockdown severely tested the mettle of the most experienced investors, with the market declining into bear market territory in record fashion. As the market has recovered most of the decline experienced from the March low, investors who found it difficult to hold on during the extreme volatility, may want to consider a reassessment of their risk tolerance because volatility flare ups are likely to continue. An investor’s risk tolerance is a function of a few key considerations. The most important among them are the investor’s investment time horizon and liquidity needs. The investment time horizon, or how long the investor expects to remain invested before requiring liquidity from their portfolio to fund their objectives, such as funding college, purchasing a house, providing retirement income or, in the case of institutions, funding operating needs, capital projects, grants and scholarships. The longer the time horizon and the lower the need for current liquidity, the higher the ability to assume risk. In addition to the basic determinants of an investor’s ability to assume risk, their willingness to tolerate potentially extreme market volatility is not as easily defined. Misjudging an investor’s risk tolerance may lead to making poorly-timed, emotional portfolio reallocations and significantly impairing long-term returns in the process. Studies conducted have shown that the average investor’s returns have annualized 2.5% over the 20-year time frame from 1999-2019, despite annualized returns of 6.1% for the S&P 500 and 5.6% for a 60/40 portfolio over the same time frame. This is primarily due to the average investor’s decisions to inappropriately reallocate their portfolio on a reactionary basis during extreme market conditions, thereby significantly damaging portfolio returns in the process, i.e. buying high and selling low. Understanding an individual’s risk tolerance and structuring a portfolio with the appropriate asset allocation before volatility flares up should prevent this outcome. Source: Dalbar Inc., JP Morgan Establishing a well-defined investment strategy and understanding the need to stick to a long-term plan can help investors stay on track when markets become challenging. An important part of an investment strategy generally includes a well-diversified equity allocation, given the superior total return potential over long periods of time. Along with the higher return potential, investors should not lose sight of the inherent volatility associated with equity investing, and not be thrown off course when market volatility heats up, as is frequently the case. Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management As depicted in the chart above, the S&P 500 has generated positive calendar year returns in 30 of the last 40 years notwithstanding the associated volatility. The chart below demonstrates the perils of market timing and the damaging effect on long-term rates of return. Source: JP Morgan Maintaining a disciplined approach and a long-term perspective is critical for investors to achieve their long-term investment goals. The client’s advisory team should gain a comprehensive understanding of their total financial picture and risk tolerance before customizing a plan to meet their financial objectives. Once an investment plan is created, it is important to review and revise it regularly as an individual’s financial circumstances along with risk tolerance may change and evolve over time. Changes to an investor’s financial situation may also require an adjustment to the investment plan and portfolio asset allocation to reflect the new considerations. It is important for investors to discuss any expected changes to their short- or long-term objectives with their advisors in a timely manner so that portfolio adjustments can be managed accordingly. You May Be Interested In: Previous WEALTH PLANNING Women Have Taken a Retirement Hit this Past Year – How Can They Recover? 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