Determining your risk tolerance is not an exact science. Questionnaires and financial tools can be used as a starting point to estimate your tolerance level. We feel verbal discussions and experience reveals your true risk tolerance. At any given point you should feel comfortable with your investments regardless of the current market cycle. Risk generally is classified by the level of financial and operation risk. In addition, the ability to predict financial results will be a determining factor along with historical and expected price volatility.
The easiest way to start looking at risk tolerance is by the percentage of equities in the account. An investor who is risk averse should have a lower percentage of equities. Investors that do not want to incur risk should have a larger component of investments such as GICs, treasury bills, and investment grade bonds (often referred to as fixed income). As fixed income investments are not generally as volatile as equities, they are a key component for those seeking low risk investments and have capital preservation as a primary investment objective. Most investors desire total returns greater than those currently offered by fixed income. As a result, even many risk averse investors are willing to hold some component of equities.
As every investor reacts differently to market volatility, it is important to find an appropriate Asset Allocation or balance that the investor is comfortable with. Investors who do not assume some risk may feel they are missing out on potential opportunities, and investors that feel they are taking on too much risk may be continually worrying about their investments. Determining the appropriate balance of cash, fixed income and equities is a very important decision.
Cash generally has little to no risk. Fixed income is generally considered low risk when compared to equities. Investors should be aware that not all bonds are low risk and that speculating on non-investment grade bonds should be considered higher risk than investment grade bonds. We classify individual equity risk as low, medium, high, caution warranted and venture capital. The following is a brief summary of our equity risk classifications:
Low Risk
Low financial and operational risk, high predictability of financial results, low stock volatility.
Medium Risk
Moderate financial and operational risk, moderate predictability of financial results, moderate stock volatility.
High Risk
High financial and/or operational risk, low predictability of financial results, high stock volatility.
Caution Warranted
Exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, exceptionally high stock volatility. For risk-tolerant investors only.
Venture Capital
Risk and return consistent with Venture Capital type investments. For risk-tolerant investors only.
