Summer 2022|volume 15|Issue 4

    Your Finances

    The Role of Risk Comfort in Your Financial and Mental Health
    Brianne King

    Brianne King

    As we know from history and our own experience, when equities enter a period of extended volatility or loss, it can be detrimental to our financial and mental wellbeing.

    Your composition of stocks and bonds makes up what is called your asset allocation. Determining the appropriate asset allocation for our clients is an important step of the financial planning process. We do this by trying to understand what our client’s risk comfort level is, often referred to in the industry as risk profiling.

    We believe your risk profile is determined by many factors:

    Reaction to market volatility, which means how much market loss can you sustain before you want to react. If you find yourself wanting to liquidate investments in a down market, your allocation to equities may be too high for your risk comfort.

    Behavioral finance simply refers to how you view and make other financial decisions. A few examples of this are comfort level of fluctuating income, views on debt, and desire to maintain purchasing power. By understanding how a client perceives risk in situations outside of the stock market can be a powerful tool in determining one’s allocation.

    Cash flow analysis is the process of determining the amount of risk needed to be taken on for you to meet your goals.

    Desired risk comfort level is an art and not a science. We use the tools to help guide us to an appropriate allocation, and along with frequent communication regarding your desired level of risk, asset allocation is finalized.

    Your risk profile is not something that should change annually but rather be reviewed as you achieve milestones in your life. When clients move from the phase of asset accumulation to asset distribution, the ability to handle volatility may not be the same as when you were working. Retirement is a good example of when your risk profile should be evaluated.

    When your risk profile is in line with your asset allocation, periods of market volatility can be weathered with a much calmer approach. This can help ensure that you stay on the guided path of your financial plan and without making knee-jerk decisions that may compromise your financial success.

    Investment Advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor. Securities offered by Registered Representatives through Private Client Services, member FINRA/SIPC. Fragasso Financial Advisors and Private Client Services are unaffiliated entities.