By Kathi Dunlap
Faith Investment Services
Bluffton, 419-358-4207
Financial advisers are required by most investment regulators (such as FINRA, SEC, etc.) to “Know Your Client.” This requirement to “Know Your Client” (KYC) includes knowing his or her tolerance for taking risks. Are all investments suitable for all people? Intrinsically, we know that they are not – but why?
Consider an 80-year old grandma who is no longer working. Her capacity to regain losses is much different than a 45-year old person who is still employed. She (generally speaking) should not be in investments that are as risky as those a younger person would invest in, because she would not recover from the downside possibility associated with those risks.
Age is not the only factor in determining how much risk is suitable. There is a certain tolerance for risk that is built into our personalities and another measure that comes from experiences we’ve had in life. Some people are inherently more ‘conservative’ and the possibility of sharp upswings or downswings is very unsettling to them. They’d rather have steady return that they don’t have to worry as much about. Others see the upside potential in ‘riskier’ investments and know that they want their money to be exposed to that potential. If it goes down instead of up, they are either poised to stay in the market for a long time until the tide reverses OR they are financially stable enough to accept some loss.
How do you know what your own risk tolerance is? One of the best ways to know is to work with a trusted adviser who can assess your tolerance for risk. This can be done in a variety of ways, but it should include:
• husband and wife being assessed separately – these risk scores are often different, and it is appropriate to know both and to take both into consideration
• there should be a measurable way to get a risk tolerance ‘score’ – there is a science to knowing how much risk you can tolerate, and it can be measured with reasonable accuracy
• this should be updated periodically – it does change with life changes and age and this is completely appropriate
• it should be interpreted by someone who can help you choose investments that align with your risk tolerance
• there are no ‘right or wrong’ answers – it’s ok to be honest about how much risk you can accept
If you have an adviser (with your company 401k or with individual investments that you hold) who does not assess your tolerance for risk, ask them how they decide what level of risk is acceptable for you. It is an important discussion that should not be overlooked.
If you have questions or want more information, please contact Gary Reese at 419-358-4207 or [email protected]
