FINRA Advises Investors to Assess their Personal Risk Tolerance Level

FINRA offered investors guidance on evaluating individual risk tolerance, and recommending they align their financial goals with appropriate levels of risk.

In an Investor Insights article, FINRA emphasized that risk tolerance is personal, and varies depending on each investor's financial situation, time horizon, and comfort with potential losses. FINRA described four key factors that influence risk tolerance:

• Investment Objectives. Investors aiming for significant growth must accept higher risk, while those focused on capital preservation should choose lower-risk investments with more stable returns.
• Time Horizon. The length of time an investor plans to stay invested significantly impacts their ability to take on risk, since there is less time to recover from losses. FINRA said shorter timelines demand safer, more liquid investments to avoid significant value reductions when funds are needed.
• Reliance on Funds. Whether the invested money is essential, or disposable should influence the amount of risk that is acceptable. FINRA said that if the funds are needed for essential future expenses—such as a down payment for a home or college tuition—then investors may want to limit their risk exposure to protect those critical funds.
• Inherent Personality. An investor’s natural disposition toward risk impacts decision-making. FINRA noted that even those financially able to take risks may hesitate if market volatility causes anxiety, which could lead to premature withdrawals.

FINRA emphasized the importance of diversifying portfolios to manage risk exposure, no matter an investor's risk tolerance level, and periodically reviewing current risk tolerances and goals. In addition, FINRA recommended diversification across asset classes to manage exposure effectively. FINRA warned against falling for high-pressure sales tactics or promises of guaranteed returns, as these are often signs of investment fraud.