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5 Areas to Review to Assess Your Risk Tolerance Thumbnail

5 Areas to Review to Assess Your Risk Tolerance

Investment Managing Your Finances

Military officers are used to, and I would say comfortable with, uncertainty. We're all very familiar with the Fog of War. There is plenty of fog when it comes to investments as well since there really is no such thing as a sure thing.

Your comfort with uncertainty when dealing with your profession may or may not carry over to your tolerance for risk when it comes to your money and investing. Follow these 5 steps to see where you sit.

1. Your Personality

As mentioned above your comfort with uncertainty in military operations may not carry over to your finances. Do you constantly watch CNBC and worry about what the market is doing? Does the thought of losing money turn your stomach? The first step is to access your comfort with fluctuating portfolio value.

2. What are Your Financial Goals?

If your goals are pretty expensive, then you may need to earn pretty high returns to reach them. With those high returns you'll get a higher level of risk which means the value of your portfolio could fluctuate a lot. On the other hand if your goals are more modest, you may be able to build a portfolio with less risk as you don't need to get the higher returns.

3. How Much Time Do You Have?

If you’re relatively young, you have plenty of time to ride out the peaks and valleys of the economy. You can tolerate a little more risk by design. If you have a goal you need to meet quickly (buying a home) or you are nearing retirement age, you may want to think more conservatively so that you don’t lose too much money. As a general rule, if you need the money in 3 years or less, you shouldn't expose your investments to market risk. Put that money in a safe account like a bank account or CD.

4. Your Wealth and Income

If you have a lot of assets and your goals are not too expensive then you can accept a higher level of risk. This is due to the fact even if you have a large loss, you'll still be able to reach your goals. It is important to note though, that you don't need to take this level of risk. Conversely, if you barely have enough assets to reach your goals, a large loss would be devastating. If a high return is required to reach your goals and you can barely reach your goals with that return, you might want to look at reducing the amount you plan to spend on goals.

If you retire from the military, the steady income from your pension may allow you to accept more risk. But, depending on your personality, it may or may not be appropriate.

5. Get Good Advice

Working with a financial advisor that specializes in working with military officers can reveal clues about your risk tolerance and map out a strategy. In our case, we'll have you complete an exercise to determine your risk tolerance and we'll look at how your portfolio would perform under different scenarios. Then we'll talk about how you would react to those fluctuations. When they do occur, you'll be ready for them and have a plan to respond versus reacting to the news. 

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