Assessing Your Risk Tolerance

Assessing the level of volatility in portfolio returns that you can withstand is a function of how much money you will need relative to your wealth, the timing of when you will need the money and your psychological ability to cope with up and down markets. The risk tolerance worksheet at the View PDF button below can help you identify the level of risk suitable for you based on these factors.

There a few components to it. At the top, you will notice a line labeled goal. Start with the first goal listed on your Financial Goals Worksheet.

Next, you will see an empty grid plotting wealth against timing. Type an “X” into the empty square reflecting both the timing of when you expect to begin spending on the goal and the amount relative to your total wealth that you expect to spend on the goal. (Because this will differ with each goal, we suggest filling out a separate risk worksheet for each goal.)

Then match the grid box you selected with the Risk Tolerance grid below. This will help you determine if your allocation should be very conservative, conservative, moderate or aggressive. Depending on your psychological ability to withstand market drops, you may be able to choose a slightly higher or lower level of risk tolerance.

We will explain how these risk tolerance categories apply to portfolio allocations in a forthcoming AAII Way worksheet.

For those of you who would like examples, we’ve created two versions of this worksheet using hypothetical people. The first is a recently retired couple, Bob and Jane, who would like to help pay for their eldest grandchild’s college. The second is a millennial in her mid-20s, Elizabeth, whose first goal is to build up her emergency savings. The June 4, 2020, Investor Update provides more background information about all three and our logic behind the worksheets.

Download the risk tolerance worksheet, fill it out and let us know how it works for you. Email us with any comments or suggestions you have for improving it.

AAII Way: Assessing Your Risk Tolerance Example 1

AAII Way: Assessing Your Risk Tolerance Example 2