Markets have been extremely volatile in the last few months, and while it’s true that volatility is normal and even healthy, it doesn’t necessarily mean it is a welcome occurrence for everyone. However, that unpredictability can be used as a tool to help you evaluate your true risk tolerance to prepare yourself and your portfolio going forward.
As we like to caution clients, everyone believes they have high risk tolerance when markets are on the rise, but it’s the dips that will reveal your true tolerance to market volatility. For those with little to no experience or education on investing, they may view these times as catastrophic, whereas experienced investors may not pay any attention to these types of market corrections. Regardless of what you think your overall risk tolerance is, use these times to measure what type of investor you truly are. Here are four of the most common types of investors.
The Opportunist
The opportunist tends to be the most experienced type of investor. They are comfortable with the ups and downs of the market and approach them strategically, taking advantage of market volatility to invest excess cash in a deliberate fashion. They aren’t necessarily seeking to time the stock market, but they are more than happy to buy “on sale.”
The Believer
The believer is aware of market movement but is not overly concerned. They recognize that investing is a long term endeavor and patiently wait for the markets to come back. However they are not in a hurry to invest excess cash either, rather they are more comfortable just staying the course.
The Doubter
The doubter is a more nervous investor. They are always waiting for the other shoe to drop with the market, and volatility serves to confirm their bias. They have exposure to the markets but are quick to react and sell some of their portfolio to limit short term losses, unintentionally trying to time the market.
The Pessimist
The pessimist is usually the least experienced investor and focuses solely on losses in the market. They are willing to sell their whole portfolio when markets decline despite the fact that they will be locking in their losses. They may wait years before getting back into the market, keeping their money on the sidelines as the market climbs back up and missing out on future gains.
There is a portfolio for every type of investor and a good advisor will help you determine the balance between your ability to take risk and your overall desire to take risk, keeping in mind your stage of life and your short and long term investment goals. If you are concerned that your portfolio is not positioned to match your overall risk tolerance, or if your advisor has not had that type of discussion with you, reach out to the advisors at ACap to start the conversation.
Matt Crisafulli, EA, CFP® is a Partner at ACap Advisors & Accountants, as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER™ practitioner and an Enrolled Agent licensed by the IRS.
ACap Advisors & Accountants is a “Fee-Only” wealth management and full-service accounting firm headquartered in Los Angeles, specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap at info@acapam.com or 818-272-8511.
