Financial Uncertainty - Understanding Risk and How to React

If you have investments, you’ve likely been shocked at how volatile the stock market has been recently. But according to Tim Fisher of Fisher Financial Advisors, the last thing you should do is panic. “While your appetite for risk may have changed recently, it’s important to identify and apply the appropriate strategy for your financial future.”

Understanding Risk

In order to stick to your financial plan, it’s important to understand the risk associated with investing. Risk is simply defined as the opportunity for your investments to either increase or decrease in value.

Your investing strategy should be shaped by both your capacity and tolerance for risk. Risk capacity refers to how much risk you can absorb, as well as how much risk is required to meet your financial goal. It is often determined by your income and financial resources.

Risk tolerance refers to “how much risk you can stomach” as the investor. Your age, job, and plans for the future can all shape your willingness to take on risk. Identifying your risk tolerance is especially important given the recent volatility of the market.

While the stock market is naturally given to fluctuations, uncertainty over the recent Coronavirus scare has had an immediate impact on its performance. On March 9th, the market dropped 7% within minutes of opening, triggering a market-wide trading halt known as a breaker. For the first time since 1997, the entire stock market was shut down for 15 minutes to halt the sudden plunge. Then, in the following days, the market was halted again, several times - an unprecedented development.

“When the market goes down, fear kicks in,” Tim explains. “Fear is a much stronger motivator than hope. This fear may trigger a natural response to want to do something, but doing nothing may be the best response.”

What Should I Do?

If this volatility has left you uncertain about your financial future, you’re not alone. But as Tim says, unless you’re planning on retiring immediately, the best course of action is to stay calm and hold tight.

“Jumping out now is probably not going to help,” he explains. “While it’s important to keep an eye on the financial environment, many people have a tendency to overreact when they should be patient.”

Tim recommends using a risk analysis tool to help alleviate your uncertainty. Free tools like Does My Portfolio Fit Me? can help you determine your tolerance for risk and form a cohesive investing strategy.

“This tool drills down into your psyche to get a better idea of your behavioral tendencies,” Tim explains. The quick, easy questionnaire identifies your investment goals - saving for retirement, increasing your income, and so on - and breaks down your “appetite for risk.” Then, it generates a Risk Number from 1 to 99 based on your answers. This will help you better understand your risk tolerance.

Once you have your Risk Number, share your analysis with your financial advisor. Together, they will help you interpret the information, determine your capacity for risk, and develop a more appropriate investment strategy.

When the stock market is afflicted with uncertainty, you shouldn’t be. Stay calm and work with your financial advisor to develop a long-term plan that will outlast periods of volatility.

Find out more about Fisher Financial Advisors at www.fisherfinancialadvisors.com, or contact Tim Fisher at 603-569-4699.