What Does It Take to Take on Risk?

Investing isn’t about luck or hoping for a quick hit. It's about understanding that risk is part of the equation—something you manage, not avoid. While risk opens the door to potentially-higher returns, it can also cause sleepless nights and unnecessary stress if not handled properly. The key? Finding the right balance for your goals, your nerves, and your wallet.

So, how much risk can you realistically handle? Knowing your own risk tolerance is essential. It’s the backbone of any good investment plan and can help you shape a portfolio that works for you—without causing you to lose sleep over every market dip.

Let’s get to the heart of it. Here are three crucial questions that will guide you in managing risk the right way.

1. What Are Your Goals and Time Horizon?

Risk tolerance isn’t just about how you feel—it’s also about where you’re headed and how long it’ll take to get there. Your investment goals and the timeline for each of them are the foundation.

Think about what you’re aiming for. Is it a comfortable retirement? Sending a child to college? Maybe you’re working toward a down payment on a vacation home. When do you need the money? That’s your time horizon.

The longer you can leave your money to grow, the more risk you can afford to take. Why? Because the market has ups and downs in the short term, but over time, those swings tend to smooth out. For short-term goals, though, you don’t want to gamble too much. For example, if your child is heading to college in a few years, you’ll want more low-risk, stable investments in their 529 plan.

2. What Is Your Risk Capacity?

This isn’t about how brave you are—it's about how much risk your financial situation allows you to take on. This is what we call risk capacity. It’s influenced by factors like how much you’ve saved, your income stability, and your financial obligations.

The more secure you are, the more risk you can afford to take. But if a market drop would leave you scrambling to pay bills or meet short-term goals, then your risk capacity is low.

And remember, risk capacity isn’t fixed. Life changes—getting a big raise, paying off your mortgage, or retiring—can increase or decrease your ability to take on risk. The key is to stay aware of these changes and adjust accordingly.

3. What Is Your Risk Composure?

Now, we’re getting into how you feel about risk. Risk composure is about your ability to stay cool when things get rocky. Because, let’s face it, not many people enjoy seeing their portfolio dip.

It’s easy to talk about risk tolerance when the market is doing well, but what happens when there’s a downturn? Can you stick to your plan, or are you tempted to sell at the worst possible time?

Behavioral biases, like loss aversion (hating to lose more than you enjoy winning) and herd mentality (following the crowd even when it’s headed the wrong way), can make managing risk emotionally tricky. Recognizing these tendencies can help you stay steady during the market’s inevitable rough patches.

Building Your Risk Profile

Each of us has a different financial situation and emotional relationship with money. By taking a close look at your goals, financial capacity, and emotional tolerance for risk, we can develop a personalized strategy. The right balance of risk can help you reach your goals—without the nail-biting or sleepless nights.

When you’re ready to find your own risk-return sweet spot, we’re here to help. Let’s get started on a plan meaningfully built for your life and your money.

Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.