Risk-tolerance reality check

Volatility seems to have become the new norm for equity markets, and ongoing political events around the globe have added even more uncertainty to the mix.

If market ups and downs are making you anxious, it may be time to re-evaluate your tolerance for risk.

The risk/return relationship

Every type of investment carries some kind of risk. Even not investing involves risk — opportunity risk, which is the risk that you could have made more money by investing than by staying on the sidelines.

Lower-risk or guaranteed investments protect capital, but you may trade off any chance of significant potential for growth. Over time, this could mean falling short of goals. To stay on track, you may need to save more, spend less, generate more income, or delay the achievement of your objective (for example, retiring at 65 instead of 60).

Keep risk in perspective

It’s human nature to overestimate our ability to handle risk when times are good — and to be exceedingly fearful after a big loss. That’s why it’s essential to focus on the long term and keep your goals in mind. Remember, too, that holding a portfolio of diversified investments helps to reduce the impact of a temporary downturn in any one.

At the end of the day, your portfolio should take enough risk to help generate the returns needed to meet your long-term objectives — but not so much as to make you uncomfortable.