Investing 101: Understanding Risk Tolerance

Considering risk when building your portfolio

There's no one right answer to what your risk tolerance "should" be. While you need to know what your tolerance for risk is, you also need to understand what your capacity for risk is.3

For example: you may be comfortable taking big risks, but if you're five years out from retirement, your capacity for risk might be quite low since you literally can't afford to take a big loss in the nest egg you'll need soon.

On the other hand, you could be decades away from retirement and have a large capacity to take risks, since you have lots of time to recover from losses. If you can keep your money in the market and ride out the volatility that lots of risk can bring, being more aggressive can help you build a bigger nest egg even if you feel like you can't save very much. A higher return could take the pressure off you to contribute a lot to your accounts when your cash flow is limited.

Creating an investment portfolio that merges both your goals and your ability to handle risk is important. You don't want to jeopardize achieving your financial goals.

If your risk tolerance is too high...

If you're overly aggressive when it comes to taking on risk, you could put yourself in a position where you can't recover the money you lose. You need a lot of capital and a long time horizon if you want to take big risks.

Taking on huge risks in the hopes of massive returns may not be a problem if you're young and early in your career. However, if you're approaching retirement or may want to use the money in your investment portfolio within the next five to 10 years, dial down the risk you take and consider playing it a little safer so you don't fail to miss your financial goals because you lost money in the market.

If your risk tolerance is too low...

On the other hand, you have to be careful with how safe you play it. If your risk tolerance is too low, you could miss out on the chance to build the wealth you need to retire when (and how) you want. Remember, less risk equates to less reward. And less reward in this case means lower returns — and potentially less wealth over time.

You can afford to be more conservative if you plan to start saving early — and save a lot. That takes the pressure off your investments to earn a certain return and may better align with your preference for less risk.

Trying to figure out where you stand in the risk tolerance spectrum? Our professionals can help you make investment choices that reflect your appetite for risk. Call us at 1-888-SYNOVUS (1-888-796-6887.)