Investors must understand their risk tolerance. This is true if you are just starting your investment life, having a mid-life investment crises, nearing retirement or beyond. Likewise you need to establish investment goals, often to obtain maximum investment return over some time horizon. These concepts apply equally to individuals and married couples.

Of course, we would all like to have

  • maximum return
  • minimum risk
  • absolute certainty

That utopia does not exist. Get real -- you can't have it all. The best you can do is maximize your expected return for a given level of risk. This is why establishing a risk tolerance is critical. You naturally ask: How do I establish my risk tolerance?

Financial planners and investment advisors often use a questionnaire to assess the risk tolerance of a new client. Typical multiple choice questions are something like:

  • What would you do if the value of your investments decreased significantly?
  • What average investment return do you realistically expect?
  • What is the relative importance of maximizing return versus minimizing losses?
  • How much cash flow will you need from your portfolio within the next few years? 
  • What is the total value of your investable assets?
  • What debts do you have?
  • What is your current income and how stable is it?

The result is usually a numerical score corresponding to a risk range from very conservative to aggressive. The next step is to formulate an investment mix that will ideally maximize your expected return, within your risk limits.

For many people its a good idea to pay for professional advice. A complete financial plan can involve much more than portfolio recommendations. Guidance with respect to insurance, pensions, social security,  and estate planning is often within the scope of a comprehensive plan. This might be expensive, but it can be the best investment you make. Just be sure that the planner/advisor is acting in your best interest and not basically selling you a financial product. They should act as a fiduciary. Ask beforehand how the person is compensated. Expect clear, concise answers. Walk away if the answers are evasive.

Your employer's 401k may provide investment planning services. If you have a relationship with an existing financial institution, ask if they offer some type of planning.

There are various online services that can help. A web search will turn up many possibilities. The adjacent resources section has several links to get you started. Check a few of these so that you become better informed. That could help in selecting an advisor. You might find that these resources are all that you need at this time.

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RESOURCES

Here are a few web sites that have risk questionnaires. Some are online, others require pencil and paper. You may have to poke around on the site to find the exact link. Remember that web content can change, so a questionnaire may no longer be available.

Once completed, you will have an assessment of your overall risk tolerance with recommendations for your portfolio makeup -- conservative, moderate, aggressive. Some sites give detailed recommendations, even to the extent of specific investments with target percentages for each.