When you think about financial planning, do you find yourself focusing on numbers - returns, account balances, or how much you should be investing? This is very common, but as financial advisers we always ask a crucial question, ‘how much risk are you actually comfortable taking?’ Knowing your risk tolerance allows us to create a financial plan that not only works on paper but in real life for you.
Risk tolerance is a measure of how much uncertainty or fluctuation you can comfortably handle in your investments. In simple terms, it’s about how you feel when markets move, especially when they move down. It is also about your unique financial circumstances including your income, savings and goals. Risk tolerance often changes which is why we review it regularly. Major life events such as a career change, starting a family or nearing retirement can change how you feel about risk.
Why risk tolerance matters
A financial plan will only be successful if you can stick with it. If your investments don’t align with your risk tolerance, well designed strategies can fall apart. Ignoring it can lead investors to panic sell during market downturns, second-guess decisions and abandon a financial plan, or chase returns that don’t fit long-term goals. If your plan properly addresses your risk tolerance you will find it easier to remain disciplined, confident and focused, especially during periods of volatility.
How we use risk tolerance in financial planning
Understanding your risk tolerance provides the foundations of your financial plan. We use this knowledge to design portfolios that align with your comfort level, and it helps us to set realistic expectations about returns and volatility. We also use your risk profile to lessen the likelihood of emotional decision-making during market swings.
Diversification is a key component of risk management. Spreading your investments across different assets, rather than putting all your money in one place can help when markets are volatile. This strategy means that when one part of a portfolio struggles, another part may hold steady or perform better. Diversification is one way to minimise the likelihood of panic selling, which can be costly in the long term.
To support clients in managing their risk we often propose a ‘bucket strategy’. This means dividing your money into separate ‘buckets’, each with a specific purpose and time horizon. Instead of viewing your portfolio as one large pool, you group assets based on short-, medium- and long-term needs and goals. Typically, a short-term bucket provides stability and liquidity, so you’re not forced to sell investments during market downturns. The medium-term bucket balances growth and stability, helping replenish the short-term bucket over time, and the long-term bucket is designed to grow over time, helping your money last longer.
The goal of financial planning isn’t to chase the highest possible return. It’s to build a strategy you can feel confident following through good markets and challenging ones. By understanding your risk tolerance, we’re able to create a plan that reflects your goals, your values, and your comfort level. If you’re not sure whether your current plan truly reflects your risk tolerance, we’d be happy to help you take a closer look. Get in touch.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions. Dobbrick Financial Services (Gympie) Pty Ltd ABN 48 931 205 109 and Dobbrick Financial Services (Ipswich) ABN 86 100 184 521 & DFS Oakland ABN 64 340 527 395 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
