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How well do you understand your investment risk tolerance?

How well do you understand your investment risk tolerance?

March 21, 2022

Will you have enough money to live the way you want when you retire? Is your portfolio meeting your needs after retirement? These are common concerns when your 401(k) or other investments have taken a significant downturn. Is it time to consider a more growth-oriented investment strategy?

It really depends on your risk tolerance.

You can take many different paths for investing – but you'll want to be sure your decisions are a good fit for your unique situation. That starts with understanding how much risk you're comfortable with. For example, what you might consider as an acceptable loss, and where you draw the line.

Understanding your risk tolerance

Investing more aggressively can bring higher rewards, but also higher risk. For example, shifting the bonds-to-stock ratio in your portfolio or adding growth funds like mid-caps could potentially jumpstart your retirement savings. But it can also introduce volatility that can be unsettling. So before you make any changes to your current investments, it's a good idea to connect with a financial advisor who can help you do a personal risk assessment.

Your comfort level with risk might factor in your family situation and timing of your retirement, as well as your current lifestyle and what you want for the future. But how can you translate those intangibles into really knowing your investment risk tolerance?

Using a scientific approach for risk assessment

Enter Riskalyze, an industry-leading scientific technology platform that helps you determine your personal Risk Number®. An investment advisor can then use your number to tailor strategies that best align with your specific needs and risk tolerance.

How people feel about risk may seem highly personal, but there's real math and science behind Riskalyze assessments that achieve 96% accuracy.1 Riskalyze is built on the scientific framework known as “Prospect Theory” that won the Nobel Prize for Economics in 2002. Prospect Theory describes the way people use probabilities that involve risk, where the probabilities of the outcomes are known.

For example, Riskalyze could help you to know that you have a 95% probability that your portfolio might be up 29.73% or down 8.67% in the next six months. Are you comfortable with that range or would you like investments adjusted to try to lower or raise expected returns?  There is no right or wrong in investing; it's what feels right to you.

Riskalyze uses objective questions and algorithms to assess risk tolerance. You can assess based on your total assets or a portion such as your 401(k), college fund, or post-retirement savings, where your risk tolerance might vary. As an example, the platform might ask what amount represents a ‘devastating loss,' and use that amount as an algorithmic foundation for specific risk questions.

Unlike subjective psychological risk profiling, the framework of Prospect Theory measures quantitative information. It looks at how people make decisions based on the potential value of losses and gains, to predict risk tolerance with a high degree of mathematical certainty.

Want to know your Risk Number?

At Buffalo Financial Strategies, many of our clients at the Los Alamos National Lab (LANL) have benefited from using Riskalyze to make more confident investment decisions. Interested to try it yourself? Let's connect! 

We help clients in both New Mexico and Colorado. Contact us today or schedule an initial consultation:


The Math Behind Riskalyze, Riskalyze, Inc.