This activity measures your unique risk preferences, specifically your "risk appetite" and "loss aversion". Together, these parameters quantify the value you attach to different potential outcomes. For example, someone who values opportunity more than certainty may be more inclined to take risks, despite the potential for unfavorable consequences. Aligning your decisions with your preferences increases the likelihood of that you will be satisfied with the ultimate outcome.
Risk appetite is your comfort level to expose yourself to uncertainty given the potential to generate investment gains. Risk appetite is a critical feature to help calibrate an investment mix that delivers on expectations, but it is not sufficient by itself, due to the prevalence of loss aversion among investors.
Loss aversion measures the degree to which an investor may have an acute response to experiencing losses in their investments. For these investors, their general attitude to uncertainty does not fully account for the emotional reaction losses cause them to experience. It is important to consider your level of loss aversion when crafting an investment strategy, as overestimating your ability to endure losses may result in emotionally driven, counterproductive decisions, such as panic-selling.
Preferences may evolve over time as life circumstances change. For example, risk appetites tend to reduce over time with age. Changes though are not always predictable, and major life events can play a role. As such, it is important to revisit your risk preferences and the appropriateness of your investments over time.
It is common for investors to misunderstand their true preferences, which is why tools like this are valuable. The profile calculated here is based on your responses, reflecting your actual decision-making tendencies. If the results are surprising in a way that you find confusing and would like to discuss, feel free to reach out to us. We're here to help.
The activity assesses your risk appetite and loss aversion through a series of questions. Based on the amount of risk you took in different scenarios of potential opportunity, your unique profile can be mapped against a range of diversified stock and bond portfolios that offer different risk/reward profiles. Portfolios falling within the identified range are consistent with your investment values, and are thus more likely to be ones you can stick with for the long-term.
Understanding your stock comfort zone is important because it helps you maintain an investment strategy that aligns with your true risk preferences. This alignment reduces the likelihood of making impulsive decisions during market volatility, helping ensure that your strategy is one you can stick with over the long-term.
Your comfort zone is calibrated to a range of outcomes that are most likely to be satisfactory to you, given the tradeoffs you value most and the many sources of uncertainty that factor into investment results. The range of potential stock allocations allows you to consider other factors that are important to the determination of investment strategy, such as your current savings, financial goals, and time horizon. Factors such as these can be used to determine which target portfolio allocation you should use within your comfort zone.
Because the overall allocation to stock is the most important investment decision in terms of the potential for upside and losses, the comfort zone does not prescribe any specific limits around the types of stocks to consider—such as large-cap versus small-cap. That said, the specific mix of stock types can influence your portfolio's risk and return profile and should be decided thoughtfully. Consider a broadly diversified exposure for a balanced risk-return profile.
Holding a large single stock position can increase portfolio risk and impact risk-adjusted returns. For investors with high risk appetite and low loss aversion, such positions may be justified if there is strong conviction in the stock's potential. However, for others, it may be beneficial to diversify and reduce concentration, assuming no constraints or restrictions on doing so.
The best investment strategy is one that you can stick with over time. Without consistency, investors expose themselves to the worst outcomes, such as panic selling that results in your bearing the brunt of market drawdowns without participating in long-term upside. A financial plan can help you find the best investment strategy within your comfort zone given your savings and long-term financial goals. Consider if a financial plan can help you better achieve your financial goals.
If your current investments do not align with your stock comfort zone, consider changing your investment elections to bring your portfolio into alignment. This may involve some complexity, as some investment elections will have mixes of asset classes rather than just stocks or just bonds. The email we sent includes instructions you can use to identify your current stock allocation, based on your current investment selections among the choices in your retirement plan. If you have questions about how it can be used to help you find a compatible set of investment elections, consider asking for support from our team. We can help answer questions you may have.
The preferences revealed in this activity can guide you in aligning your investment strategy with your comfort zone, which increases the sustainability of your approach and is important to long-term success. Developing a goals-based financial plan can also help you identify other important factors, such as your current and future savings levels and time horizon.
Your company’s retirement benefits plan has resources that may help, including educational literature and seminars, online tools and calculators, and support from professionals. These resources can provide further information about how to achieve your financial goals and help you implement an investment strategy that aligns with your preferences.
Yes, as you approach retirement, your investment decisions become increasingly important. The transition from accumulating savings to drawing them down introduces new complexities, such as ensuring your assets last throughout retirement and managing the timing of withdrawals to avoid depleting your funds too quickly. As such, capital preservation becomes a more important component of an investment strategy. Due to this complexity, participants should consider building a financial plan that can help take all the different considerations into account.