I'm Stephanie Sammons, a CERTIFIED FINANCIAL PLANNER™ and the Founder of Sammons Wealth Management. I help successful women professionals who are in midlife plan for their ideal retirement. Learn more about planning, saving, and investing for your ideal retirement at Sammons Wealth Management.

Show Notes for this Episode:

What is personal risk tolerance

How well do you handle risk-taking? I’m not referring to risk in general here, like parachuting off of a cliff. I’m referring to risk in the context of your retirement nest egg or investment portfolio!

What personal risk tolerance means when referring to investing is how well you can tolerate the ups and downs. There really isn’t risk for permanent loss unless you sell out of everything at a low point in the markets.

The definition of risk in the context of investing is volatility. Volatility is just a fancy way of saying “ups and downs”. Your personal risk tolerance measures how well you can tolerate the investment experience as your nest egg fluctuates up and down.

There are more up days than down days in the markets, and recessions and bear markets come about once every 8 years on average. Your personal risk tolerance can help determine how you should be invested to stick with your strategy through any and all of the ups and downs.

Your personal risk tolerance can impact your investor behavior as well as your portfolio performance, and ultimately your retirement goals and lifestyle. The effect can be positive, negative, or even disastrous.

A risk tolerance lesson from the pandemic bear market

A recent article from the WSJ shared the results of a study done by Fidelity Investments. When they looked at how their investment customers behaved through the pandemic bear market, one-third of those 65+ sold all of their stock holdings between February and May. Nearly 20% of customers across all age ranges did the same.

It’s likely that most of these folks then missed the rapid rebound in the markets. The decline of 30%+ was rapid, and the rebound back to the upside was just as quick. So what now? When do they get back in? Do they invest a little at at time now or just put the whole chunk of change back in?

This is a game that nobody can win. Timing the market based on your emotions is not a strategy for achieving your retirement goals and sustaining your lifestyle in retirement.

Many investors who are over 50 fall into a mentality trap that says “I’m too close to retirement and therefore I can’t afford to take a hit now”. This is flawed thinking. This is your emotions talking. When you reach retirement, that doesn’t mean you take your retirement portfolio to cash and put it under the mattress.

What many fail to understand is that retirement is simply a new beginning. You have a very good chance of living another 30-40 years in retirement! Because of our extended longevity (due to advances in healthcare and technology that will only continue), you will have many more years to sustain your income by keeping up with rising costs and taxes.

To and through retirement, you will need some allocation to stocks in your portfolio. Stocks have outperformed every other asset class over the long-term, and investing in them is what provides the growth you’re going to need throughout your retirement years.

How to assess your personal risk tolerance

In this episode I share I describe the different types of investment risk, including your risk comfort level (how much you are comfortable with) and your risk capacity (how much you really need to take to achieve your goals).

When I assess the risk tolerance of new clients to my firm, Sammons Wealth Management, I often find that their portfolios are invested more aggressively than they are comfortable with. This misalignment is what causes those big mistakes that can impact your retirement. You want your retirement nest egg to be 100% aligned with your risk tolerance.

Fortunately we as financial advisors have come a long way in being able to accurately evaluate personal risk tolerance as well as the risk level of your investment portfolio.

I utilize a tool with my clients called Riskalyze. Riskalyze takes you through a short online questionnaire where you walk through a series of trade-offs to determine how much upside in your portfolio you are willing to give up for greater certainty on the downside.

I’ve been pretty amazed at how accurately Riskalyze assessed the risk tolerance of my clients, especially through this bear market we’ve experienced due to the Coronavirus pandemic. It does a great job of defining your ultimate pain point, which is that point where you almost can’t emotionally endure any further downside in your portfolio.

All of my clients have been able to stay invested and stick with their investment strategy through the pandemic bear market. Why? Their retirement nest egg portfolios are aligned with their personal risk tolerance. Yes, they experienced some downside, but they also received the benefit of the rapid rebound in the markets that followed.

Riskalyze is unique in that it gives you a risk number between 1 and 99 based on how you answer the questions, with one being the most conservative and 99 being the most aggressive. Once your personal risk tolerance is identified and assigned a number, you can see what to expect on the upside and downside with your portfolio over the next six months with a 95% probability.

Do you want to know what your personal risk number is? I’m offering my listeners and readers a chance to get their personal risk number for free utilizing my Riskalyze tool!

Click here to get your personal risk number

To get all the details on understanding how much risk to take with your retirement nest egg, listen to this episode of the Midlife Money Gal podcast:

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