Ask Yourself 3 Simple Questions .
1 . How much can I stand to lose emotionally ?
The assets that offer the highest potential reward are often the riskier ones . Portfolios with larger allocations to stocks typically deliver higher returns over time , but they are also more volatile , which may not work for everyone . If you simply can ’ t bear to see your portfolio plummet in value , you should choose a more stable investment mix .
On the other hand , reducing your exposure to stocks and other relatively high-risk , high-reward assets during your peak earning years comes with its own kind of risk : falling short of your goal .
To help manage your emotional response to market volatility , consider cutting back on how often you review the performance of your long-term accounts . In fact , research suggests that the less often people check their investments , the more risk they will be comfortable taking .
2 . How much can I stand to lose financially ?
While many people think about risk in terms of their ability to endure losses emotionally , there ’ s another component to risk that ’ s equally important : your capacity to recover financially .
Time is the primary issue here . Those who have a decade or more before they expect to tap their savings can likely wait out some short-term volatility . For someone who may need the money sooner — in , say , five or fewer years — a market downturn can be devastating .
3 . How well do I know myself ?
It ’ s worthwile to try to square your financial capacity for risk with your emotional tolerance for it . What makes this hard is that humans are notoriously bad at predicting in advance how they ’ ll actually respond to a given set of conditions .
You might try asking someone close to you to rate your risk tolerance . A spouse or a close friend may be able to identify patterns of behavior that you don ’ t recognize in yourself . Financial advisors are also well suited to this role . Their experience with a broad range of clients can lend some perspective on where you fall along the spectrum of risk tolerance .
In the end , figuring out how much risk you can really handle is an art as much as it is a science . But when you have a better idea of how much you can stand to lose — both emotionally and financially — you can put together a plan that balances your long-term need for growth with the more immediate need to be able to sleep at night .
Build a plan , create accountability , focus on the big picture and enjoy the journey .
Leslie C . Killgore is the Independent Branch Leader at Charles Schwab in Greenville . She has over 35 years of experience helping clients achieve their financial goals . Some content provided here has been compiled from previously published articles authored by various parties at Schwab .
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice . Diversification asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market . 0621-13J7