Risk Tolerance, Time Horizon, And Investment Style

Risk tolerance means your ability to tolerate the fluctuation of the market. People with low-risk tolerance invest in conservative investments that are not volatile and do not change much with the market. An example is fixed-income investments and income stocks. However, conservative investments usually yield less. People with high-risk tolerance invest in aggressive investments that could change a lot and are volatile. However, aggressive investments, like growth stocks, have the potential for a much higher yield than conservative investments.

This may sound like a personal choice or attitude only. However, it depends on several other factors, such as short-term or long-term financial goals, time horizon (especially age if you are planning for retirement), financial situation (ability to withstand losses), and investment experience. This is why a financial advisor is needed, and it would make the investor's emotional choice more objective.

Short-term financial goals, like paying off debt or saving for a house down payment, are invested in a conservative fund (including the emergency fund). In contrast, long-term financial goals are invested in an aggressive fund because they have enough time to withstand fluctuations. The exception is a retirement fund, where you should invest in an aggressive fund while young, change to a moderate fund in midlife, and then to a conservative fund before and during retirement.

Experience also matters. Experienced investors could tolerate higher risk-taking. In my opinion, investors should generally invest for the long term, mix aggressive and conservative investments, and slowly switch to more conservative ones as they age. In addition, they should invest portions of their wealth in different types of investments and never go all in one kind of investment. No matter what, investors must consult with a financial advisor, and that is always worth the money because of their objective and experienced outside look at your portfolio, which helps you decide which investment and how much.

Wealthy and financially comfortable investors could also tolerate higher risk because they can withstand some losses. However, they should not jeopardize much of their wealth and only put some eggs in one basket. This is more as they get older and lack time to recover.

Here at Zaki Financial, we have a risk tolerance tool that is free to anyone and provided as part of our agreement with every client. After that, the client takes the test and sees his score. He is presented with the other factors and asked to make a decision. If the decision does not make sense to us, we would advise the client to change his investment style choice. There's no additional fee for that, and it's part of our investment management service.