Risky Business: Aligning Risk with Reward

Understanding your risk tolerance is essential in investing, and it’s important to reevaluate it regularly. Your comfort level with investment fluctuations may shift as market conditions and personal circumstances change. Periodically checking your risk tolerance helps ensure your portfolio aligns with your current goals and feelings about risk.

Determining your risk tolerance involves personal insights and objective measures. Investors typically begin with risk assessment questionnaires that consider age, income stability, investment goals and financial responsibilities.

It’s important to align your investments with your financial aspirations, whether that’s buying a home, funding your grandkids’ education, or traveling in retirement (or all of the above). Don’t overlook the psychological aspect — how you perceive risk and react emotionally to market fluctuations matters greatly. Also, practical factors like your investment timeline and income stability can influence your risk tolerance. By considering all these elements, you’ll better understand the level of risk that feels right for you. To help ensure your portfolio is allocated correctly according to your risk tolerance, start with these actionable steps:

• 1. Assess Your Risk Tolerance: Take a moment to reflect on how much risk you’re comfortable taking. Are you more of a conservative investor, or do you lean toward higher risk for potentially greater rewards?
• 2. Review Your Current Portfolio: Look at your current investments. Are they aligned with your risk tolerance? A mix of asset classes can help balance out risk.
• 3. Diversify: If you find that your portfolio is heavily weighted in one area, consider diversifying across different asset classes — like stocks, bonds and real estate. This helps spread risk and can enhance your potential returns.

Over the past few years, especially in 2023, we’ve seen some interesting trends in the market. The Morningstar US Market Index jumped an impressive 26.4% [1], and by the fourth quarter of 2024, the S&P 500 returned an average of over 20% YTD [2]. This market rally, largely fueled by technology and growth stocks, might have pushed your portfolio into riskier territory than you are comfortable with. During these market booms, it’s easy to get caught up in the excitement and ride the wave without checking if the increased risk fits your comfort level. However, it’s important to take a step back and reassess your risk exposure.