Risk tolerance and time horizon are two of the most important factors when determining how to invest. Risk tolerance is the volatility one can handle when their investments don't perform as expected. Time horizon is the expected length of time the assets can be invested before they are needed to fund a goal or objective such as a home purchase, college education or retirement.
The lower your risk tolerance, the more likely you are to have a large portion of your portfolio in lower risk assets such as bonds and cash. With a higher risk tolerance, you can withstand more volatility and are more likely to be invested in growth oriented securities such as individual stocks and equity mutual funds. Time horizon is crucial and understanding appropriate risk tolerance. The longer time horizon generally the more risk you can afford to take because you have more time for the portfolio to recover if you encounter poor performance.
Financial planning is crucial in helping clients understand risk tolerance and time horizon before making prudent investment decisions. We often see young clients not take enough risk and miss out on better returns over the long run and adversely see older clients with too much risk as they approach major life events such as retirement.
RMR incorporates a plan first mentality with all new clients. This means building out a comprehensive financial plan that helps lay out a client's goals and objectives and how to best meet them. From there, we designed the most suitable portfolio based on their risk tolerance and time horizon. Contact RMR to work with a CFP professional today!