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Sound Financial Group - Bothell, Washington

 

SFB024 The Differences Between Loss Tolerance and Risk Tolerance

| July 12, 2016
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Episode Summary

Paul Adams explains the key differences between a loss tolerance mindset vs. a risk tolerance mindset. He shares a couple of examples throughout history of how thinking of your investment portfolio from a risk tolerance perspective can be deadly to your financial future when the market turns south. Instead, he says, frame your thoughts from a loss tolerance perspective. How much can you lose and if you were to lose this investment, would you still be okay? This sets your financial future up in a stronger way so that if things do turn south, you will not be the one to suffer financially.

What Was Covered

  • 01:15 - Feel free to reach out to us and let us know what you’d be interested in hearing.
  • 04:00 - People get confused between the two terms - loss and risk tolerance.
  • 06:15 - Risk doesn't equal return. Risk might equal a return.
  • 07:45 - Wipe out the word risk tolerance.
  • 07:55 - Loss tolerances means how much are you okay with losing by being in this investment?
  • 09:55 - We will have very real losses if we can't stand within the portfolio.
  • 11:50 - Paul explains how he words it for his customers at his firm who want to take on more risk.
  • 13:15 - It's an easy out for the financial advisor to increase the risk.
  • 13:30 - Is your financial advisor really having a hard conversation with you?
  • 16:35 - That's one of the biggest reasons why people break in strategy, they didn't think about their loss tolerance.
  • 16:45 - Another reason why people break in strategy is they get the allure that something else might be better. Paul explains further.
  • 19:30 - Instead of moving all of your assets into what looks like a booming industry, maybe you just need to make a slight change to your investment portfolio first.
  • 20:35 - You should always be re-balancing your portfolio or else your risk tolerance will drift.
  • 21:15 - Loss tolerance is key. Risk tolerance is a made up term.

Tweetables

"We've been programmed to think that risk = returns, but it doesn't."

"Risk might equal a return."

"Wipe out the word risk tolerance. Say to yourself, 'loss tolerance'."

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