Understanding Risk Tolerance
In these uncertain times, we have witnessed many changes in the stock market. How you react to these changes can reveal the type of investor you are, and the amount of risk you are willing to tolerate in your investments. Risk tolerance is the degree to which you can psychologically stomach losing money on your investments. Your tolerance for risk may change over time as things change in your life — for instance, as you age and approach retirement, or as your financial obligations like mortgage or college expenses change.
Understanding your risk tolerance is a fundamental step in creating a long-term investment strategy that you can live with. If you take on more risk than you are comfortable with, you stand the chance of panicking when investments decline or making poor decisions based solely on emotion.
Knowing Your Risk Tolerance Is Important
Different types of investments carry different levels of risk. For example, a UFCU certificate has virtually no risk. It is insured, and the return on fixed-rate certificates is guaranteed. However, a mutual fund or individual stock purchase through CUSO Financial Services, L.P.* will fluctuate in value over time. In exchange for taking on that additional risk, you potentially can earn higher returns — but you also could potentially see your investment decline.
One of the factors vital to assessing your situation is your investment time horizon. How long will you be able to keep your money invested before you need it? Someone closer to retirement who will need their retirement funds in just a few years likely will be more conservative and less risk tolerant. On the other hand, someone who is just starting their career has a longer window to recoup any down markets, and may be more willing to withstand greater volatility.
Managing Your Risk
Regardless of your risk tolerance, it is important to diversify your assets. Diversification cushions you from volatility when one type of investment — say, stocks — declines in value. The idea of diversification is that other assets — for instance, bonds, real estate, or certificates — can offset downturns in other assets. A reputable financial advisor can guide you in creating a well-diversified investment portfolio that fits your risk tolerance.
* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UFCU has contracted with CFS to make non-deposit investment products and services available to credit union members.
Was this article helpful?
Thank you for your feedback.