If you were on a gameshow and you just won $1 million, would you continue playing and risk it all, or walk away with the money in your pocket?
What if you were asked this question 10 years ago, or 10 years from now? Would your answer be any different? Would your answer be different if you were married than if you were single? What if you were a parent? Would your answer be any different if you lost your job, lost your spouse or recently suffered a loss in your portfolio? In our experience at PAX Financial Group, the answer to these questions is yes!
At PAX Financial Group, an investment risk tolerance test is a crucial step in creating a financial plan, because your answers dictate the strategies you incorporate. But it’s not a set-it-and-forget process. As your life changes, so, too, will your risk tolerance. Big adjustments in life often come with changes to your wealth and spending needs, along with your priorities, your ability to invest and your time horizon. This can include marriage, divorce, even a job change.
For many investors, COVID-19 was reason for change – maybe this was your first experience with a volatile market, or maybe your outlook or situation changed. When this happens, it’s important to review your plan and adjust it accordingly.
Sometimes, it’s simply age that prompts a change to your risk tolerance. As you approach retirement, your objective can change from portfolio growth to preserving your assets.
Your plans for retirement should also be considered. If you no longer plan to travel in retirement, but instead, dream of a quiet life at home, you may not need as much money in retirement, and therefore, you may not need to take as much risk in your investments.
At PAX Financial Group, we work with clients in San Antonio, Texas and nationwide, and in our experience, there are 10 common scenarios when an updated risk tolerance test makes sense.
Susan Got Married
Marriage brings a lot of change, both emotionally and financially. For starters, with a new spouse often comes additional income and a separate set of retirement plans. Sometimes marriage also means two drastically different risk tolerances. If your financial outlook is different than your spouse’s, work with a financial advisor to find a common ground and design an investment plan with “household” risk tolerance in mind. (Read our recent blog post: Marriage and Money: 5 Tips for Making it Work.)
Jason Changed Jobs
If you take a new job that comes with a big pay raise, or if you lose your job or take a big pay cut, you’ll likely want to adjust your plans accordingly, saving either more or less in your retirement accounts, and maybe even adjusting your asset allocation as well.
Mike and Melissa Had a Baby
When you add to your family, you now have another person to consider in your financial plans. Are you still comfortable with the amount of risk you’re taking with your investments? You may want to divert money into college funds, for example, that carry less risk. (Read our recent blog post: The Right Way to Pay for a Good Education: PAX and Parents.)
Janet Reached a Financial Goal
When you were saving for a short-term goal, like paying off student loans or buying your first home, you may have been more conservative in your investments as you worked and saved. But once you’ve achieved a goal, you may be ready to shift your focus to longer-term goals, like retirement. Depending on your time horizon, you may be willing to take a more aggressive approach, because you have more time to make up for any loss you may incur.
Peter is Nearing Retirement
The closer you get to your target retirement date, the less risk you may want to take. Suffering a catastrophic loss as the result of a risky investment can be especially devasting as you near retirement, because you don’t have as long to make up for the loss and will soon start living off of your investments. This is often a good time to adopt a more conservative strategy – but not always!
Joe and Amanda’s Retirement Plans Changed
If you decide to retire earlier than planned, or push your retirement date to later, a risk re-evaluation may be in order, because you have more, or less, time than you originally planned for saving and investing.
Sarah and James Got Divorced
As mentioned above, when you get married, it’s important to find balance when it comes to your finances. If your spouse is no longer a consideration, your situation, and your risk tolerance, will likely change. Your post-divorce risk tolerance may not be the same as it was pre-marriage – do you have children to worry about now, did you take time off from work to raise a family and therefore your income changed, or are you simply older and less interested in taking financial risk as you once were? Take your entire situation into consideration. An updated investment risk tolerance test should take into account your age, your financial situation as an individual, and what you’re financially walking away from the marriage with.
Louise Lost Her Husband
The death of a spouse is one of the most drastic changes a person can experience in their life, emotionally, physically and financially. Losing a spouse will most definitely alter your retirement plans and goals, and it may significantly affect your current financial situation (the possibilities of double-to-single income, life insurance payout, medical bills, etc.). After taking some time to grieve and deal with the emotional toll of losing your partner, talk with a financial advisor and make a plan.
Tom’s Outlook Changed Because of COVID-19
The global pandemic changed a lot of things for a lot of people, from how they work to what’s important. People asked themselves: Do I have enough in my emergency fund? Am I saving enough? What if I find myself out of work for a long period of time? A financial risk tolerance test can help you pinpoint areas where you’re no longer comfortable.
Bill and Mary’s Situation Changed
If you lost your job, changed careers, bought a new house, sold your home and downsized, relocated for your job, etc., chances are your investment risk tolerance was affected. Talk to a financial advisor about how these changes factor into your current and future investment plans.
Are You Taking the Right Amount of Risk?
As you can see, risk tolerance isn’t a one-time calculation. Are you taking the right amount of risk in your portfolio? If you’re not sure, work with a financial advisor and review your plan at least once a year.
Based in San Antonio, Texas, PAX Financial Group is passionate about helping clients live the life of their dreams. Locally owned and independent, our team of financial advisors offer holistic financial assessments, investment management and insurance all in one place. If you’re currently looking for a financial advisor, contact the PAX Financial team to see how we can help.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
