Finding Your Risk Tolerance Through Honesty and Integrity
It is extremely difficult for someone else to accurately determine your level of risk tolerance. There are a number of different unique personal factors at play, making it hard for any large investment firm with numerous clients to keep track of. For this reason, among others, it is important to bring honesty and integrity into your decisions for making smart capital. That is, you should not only be honest and treat others with respect, which is of course a good thing to do in all aspects of life, but you should also be honest with yourself.
In other words, when it comes to determining your level of risk tolerance, you need to cultivate self-honesty surrounding your goals for the future – such as plans for your family or for retirement; and about your ability to handle possible issues, like a downturn in the market or fluctuations due to market volatility. For risk tolerance means the maximum amount of uncertainty that you are able to handle regarding your investments, and without honesty and integrity, it is easy to over or under invest due to a misjudged level of risk tolerance.
The time period of one’s life also comes into play when assessing risk tolerance, as many different changes can occur. This might include moving to a bigger city like Toronto, changing careers, or starting a family. In this sense, honesty and integrity are of paramount importance. They allow you to more accurately predict your pathway for the future, such as being honest with yourself about your future career goals or about wanting to start a family etc. That way, you can more appropriately assess your amount of risk tolerance both now and in the future, and start making the right investments to help you build smart capital.
It is important to keep in mind that while it can be difficult to assess your own level of risk tolerance, it is even more difficult for someone else to do the same (especially if they are managing the portfolios of countless other clients). While talking to a broker at a Toronto investment firm can help you get an idea of some of your available options, your decisions for building smart capital should be highly influenced by your own personal introspection.
In terms of making long term investments, being steadfast and resilient against selling until you reach your target date has historically been a good decision for building smart capital. So, by holding out from selling and by continuing to add to a long term investment, you can avoid the fees and taxes that would hamper your return if you were to withdraw early. Also, market volatility – and your risk tolerance for it – can largely be ignored in this scenario, since it has little impact on your expected returns over a long period of time.
If you are planning to invest for retirement or have intentions of making any other type of long term investment, self honesty and integrity are still extremely important. You need to be honest about your goals for your investment, and about your ability to hold out until the end (i.e. not withdrawing early). To paraphrase the words of the great essayist T.S. Elliot: only those who are willing to risk going too far are able to determine how far they are actually willing to go. Noah Murad, the CEO of Mill Street & Co., believes that this applies directly to risk tolerance, and that it is one of the most effective ways of determining the true level of maximum risk that we are able to tolerate when investing.
In a city like Toronto, the average large investment firm will have a general questionnaire to help decide how to sort a client’s risk tolerance in broad terms. However this may not actually be beneficial for building smart capital in the long term, since it is more generic and less personalized to the individual. This is to say an investment firm will provide you with a risk tolerance profile that is not really an accurate reflection of the level of risk you can tolerate, but rather an assessment of how much risk you would be able to tolerate within the vacuum-like parameters setup by the investment firm themselves.
For Noah Murad of Mill Street & Co., honesty and integrity are core values that should be cultivated in order to help an individual build smart capital and accurately assess the level of risk that they are able to tolerate. For more information on assessing risk tolerance, Noah Murad has shared his in-depth views on the matter in his Perspectives No. 5 piece, which can be found on the Mill Street & Co. website. From here, you can also find his take on business management, the psychological behaviour of investing, and effective ways to build smart capital within a modern economic context.