These are stressful times for anyone with investments. If you’re like anyone, even me, you are constantly checking your balance to see how much you’ve lost to often. It’s hard on the emotions. But you did a risk tolerance questionnaire and scored *insert random number*! Shouldn’t that have protected you from losing money to some extent? You’ll never reach my retirement goal now, right?

Unfortunately, the investing world, including regulators, believes that a risk tolerance questionnaire is necessary to help you find the correct investment allocation for your portfolio. The problem with this concept is that most people answer these questionnaires when they are relaxed and not dealing with stress. It asks you how you will feel when you lose 30%, 40%, or 50% of your portfolio when it may not be a realistic idea at the moment. How could you put your mind into that dark place to feel that kind of portfolio pain? You could have been there in the past and still, you won’t be able to remember those harsh emotions enough to impact your answers the way they should.

So How Do You Determine Your Asset Allocation?

Your total investments don’t cover all your investment goals. Even if you are accumulating for retirement, you are still going to break down those savings to serve different purposes. For example, half your savings could be allocated to cover your basic living expenses, a quarter for medical needs, and a quarter for fun. Each of those purposes should be needed at different times so their investments should correspond to that time horizon.

I Call This Risk Capacity Of Your Investment Goals.

Risk capacity is based on when you will need the proceeds and if enough risk is taken to reach the balance needed to accomplish that goal. For example, if you are buying a house within a year, you most likely want to keep your savings in low-risk investments like short-term CDs, cash, or T-bills. If you are saving for retirement and it is 20 years away, you can move further out on the risk spectrum because the account can endure that risk over the long term. Another example is a couple looking to retire in less than 5 years, they have lofty retirement spending expectations and a retirement balance that won’t suit that retirement spending budget. This couple will need to take higher than average risk if they want to meet their goal or the couple will need to adjust their expectations.

I feel as though this makes more sense than a questionnaire based purely on your emotional reaction to an investment crisis. You can’t put yourself in the right mindset to accurately answer those questions. Using risk capacity based on your goals will give an objective perspective when selecting investments for your accounts. This will allow you to remove your emotions from the account decisions from the start and let you know that your investments will react to market fluctuations based on when you need it for a particular life event. Knowing your portfolio has an exact purpose gives you peace of mind to let it run on its own without the balance stress.

This doesn’t mean you should ignore your accounts. You should be constantly reviewing your goals but this concept will give you a plan to focus on during market volatility. Reach out to Ryan Kaysen today to discuss your goals and pair them with the appropriate risk capacity. You can’t put a price on peace of mind.

Fiduciary Mission

At Integritas Financial, we are committed to providing fee-only, fiduciary financial planning services that are tailored to the unique needs of young professionals, particularly millennials. Our experienced planners work with you to develop customized financial plans that address key areas such as estate planning, trusts and wills, retirement, workplace benefits, education funding, student debt, and buying a house.

We believe in transparent, client-focused service that puts your financial goals at the center of everything we do. As a fiduciary firm, we are dedicated to acting in your best interests, and we never sell products that charge commissions to clients.

Our goal is to help you achieve a stable and prosperous financial future by providing comprehensive financial planning services that are tailored to your individual needs. Whether you're just starting out in your career or you're already well-established, we can help you navigate the complexities of financial planning and create a roadmap for success.

Ryan@if-money.com