Written By: George Shirley. Any opinions are those of George Shirley and not necessarily Raymond James or RJFS.
Risk tolerance questionnaires that ask a series of questions in an effort to understand an investor’s tolerance of risk are a popular way to determine how to invest. By classifying investors into a category, (Moderate Growth, Conservative Income etc.) investors will have a portfolio that matches their risk tolerance-- at least that’s the theory. But as the market continues up into the 8th year of an expansion, we have seen risk tolerance change for many people as the perception of the actual risk in the market seems to have changed for many investors.
There is often a tendency to overweight recent events in evaluating the current state of affairs, and given the relatively low volatility that we have experienced over the past several quarters, I have had recent discussions that involve the feeling that an investor hasn’t participated as much in the market gains as they feel they should have.
And in other discussions, the feeling that the market has to be irrationally high given how long it has been going up. In each case, the better questions to ask are not about the market, but rather how has your life changed? By investing are you getting closer to meeting you objectives, or are you putting that at risk chasing returns?
Changes in risk tolerance based on changes in your life are much more compelling reason than changes in the market. Looking backward (always a way to make us feel less intelligent) we have seen many events that could have derailed an investment plan. But is it also important to put some perspective on where we are in the market versus where you are in your life. If you need to take on more investment risk to meet your financial goals, then that is a different discussion to have than simply making a change based on feeling that you’ve missed out on some upside, or that we need to cash in because things are too high.
Please note there is no guarantee that any investment strategy will ultimately be successful, profitable, or protect against a loss.