The Importance of Investment Risk Tolerance Assessment

How tolerant are you of financial risk? This is a question each person must ask before making any kind of financial investment. The more you gain to lose, the more you must consider the level of risk. But what if you oversaw a three-generational financial portfolio that includes millions of dollars and supports tens, perhaps even hundreds, of people? How would you assess risk, then? 

A risk tolerance wealth assessment is vital for high-net-worth individuals looking to create a balanced investment portfolio. By evaluating asset allocation and understanding risk tolerance, financial advisors can manage market fluctuations and minimize  exposure for clients while still achieving growth. Factors such as risk-return, exposure management expenses, and market conditions all affect risk in one’s investments, making it crucial to have a comprehensive plan in building an investment portfolio. 

When assessing risk, there are three levels to consider: aggressive, moderate, and conservative. An aggressive investor with a high-risk tolerance is willing to risk losing money for more substantial results. Aggressive investors are market-savvy and understand the volatility of securities. Many high-net-worth individuals fall into this category and benefit significantly from building a team of wealth and financial advisors. Their investment strategy emphasizes capital appreciation; rather, than guaranteed income or protecting principal investment. This investor’s asset allocation commonly includes stocks with little or no bonds or cash allocation. 

Moderate investors want investments to grow without considerable risk. Their goal is to weigh opportunities and calculate the risks. Sensible investors look to diversify their portfolio to include a mixture of stocks and bonds to achieve smaller gains but with a much lower risk assessment profile. This strategy is more commonly described as a “balanced” strategy. 

Conservative investors are willing to play it safe and risk no volatility in their portfolios. This makes sense for retirees or those close to retirement age. Who are not willing to risk a loss. 

For high-net-worth individuals, tolerance is diversified throughout the entire financial portfolio. This is where a qualified financial advisor can offer areas of risk balance – high risk for one segment of the portfolio and safer investments in another or multiple. 

With the help of a professional financial planner, investors can evaluate their assessed risk tolerance and stage portfolio size according to their comfort level. This assessment captures various questions about income, financial goals, behavior, feelings, and age. It helps investors understand how market shifts and changes in current behavior can affect their investments and wealth.