How do I determine risk tolerance?

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Strategists from Wells Fargo Investment Institute offer insights to help determine how much risk investors may afford to take in their portfolio.

Your risk tolerance is the degree of fluctuation in your investments that you can live with while sticking to your long-term investment plan. The questions and answers below, provided by the strategists at Wells Fargo Investment Institute, can help you determine your comfort level with risk, and what that may mean for your investments.

To make things simple, strategists at Wells Fargo Investment Institute suggest that you should think about your personality type. Are you the type of person who is nervous about losing money, or are you someone who takes a long-term view and is willing to ride out the lows of the market without undue concern? Your personality type can then help lead you to an appropriate risk profile. Wells Fargo Investment Institute breaks investor risk profiles into three easy categories:

  • Conservative: These investors are generally more risk averse and afraid of losing their savings when the financial markets decline.
  • Moderate: These investors are willing to accept a modest level of risk that their investments may decline from time to time to a greater degree than conservative investors in exchange for the potential to receive modest returns.
  • Aggressive: These investors are less worried about the day-to-day ups and downs of the market and are willing to take the risk of greater losses in exchange for potentially higher returns.

Generally speaking, investments with greater risks can produce greater losses but may also lead to higher levels of returns. Wells Fargo Investment Institute aligns three categories of portfolios with the risk profiles listed above:

  • Income: This is expected to provide an income stream that can offer some potentially lower participation in a down market. Overall, portfolios are likely to experience lower long-term returns, however, in exchange for lower risk.
  • Income plus growth: Growth and income portfolios are expected to provide higher potential returns and experience greater levels of volatility.
  • Growth: A growth portfolio generates little to no income and has the highest relative levels of return potential and risk.

Income portfolio example

Conservative income

Conservative income portfolio

12% equity, 85% fixed income, 3% cash

Income portfolios emphasize current income with minimal consideration for capital appreciation and usually have less exposure to more volatile growth assets. Conservative Income investors generally assume lower risk, but may still experience losses or have lower expected income returns.

Income plus growth portfolio example

Moderate growth and income

Moderate growth and income

54% equity, 43% fixed income, 3% cash

Growth and income portfolios emphasize a blend of current income and capital appreciation and usually have some exposure to more volatile growth assets. Moderate Growth and Income investors are willing to accept a modest level of risk that may result in increased losses in exchange for the potential to receive modest returns.

Growth portfolio example

Aggressive growth

aggressive growth portfolio

91% equity, 7% fixed income, 2% cash

Growth portfolios emphasize capital appreciation with minimal consideration for current income and usually have significant exposure to more volatile growth assets. Aggressive Growth investors seek a higher level of returns and are willing to accept a high level of risk that may result in more significant losses.

Source: Wells Fargo Advisors Intuitive Investor®. These charts are for illustrative purposes only. The charts are conceptual and do not reflect any actual returns or represent any specific asset allocations.

These three factors in particular can have an outsized impact on your portfolio.

Time Horizon: How much time do you have to work toward your investment objectives? Investors with shorter time horizons will likely want to reduce risk to preserve savings, while investors with longer time horizons may consider taking on more risk for more potential growth.
Diversification: Portfolios that are diversified across fixed income, equities, and other types of assets generally have seen less historical volatility.
Liquidity: While some types of investments can be converted to cash quickly, others may be harder to liquidate. If you think you may need to access your investment dollars to meet near-term financial obligations, the types of investment you choose will be an important consideration.

  • When planning for the long-term, first determine your investment goals.
  • Next, you should determine the level of risk you are willing to take in order to help achieve those goals.
  • Whether your risk tolerance is conservative, moderate, or aggressive, we believe that diversification can help you to manage risk.

This information is provided for educational and illustrative purposes only.

Diversification is an investment method used to help manage risk. It does not guarantee investment returns or eliminate risk of loss in a declining market.

All investments are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors due to numerous factors some of which may be unpredictable.

Investments in fixed income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, NA., a bank affiliate of Wells Fargo & Company.

Opinions represent WFII’s opinion and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained within. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.