How much investment risk should you take?

Reviewed by Michael Landsberg, CIO, Landsberg Bennett Private Wealth Management.

If you're a retiree or a high-net-worth individual, figuring out how much risk to take with your investments can be tricky. The short answer? It depends. It comes down to what your financial goals are, how long you plan to stay invested, and how comfortable you are with the ups and downs of the market. You want to grow your money, but you also need to protect what you’ve worked hard to save.

Understanding your risk tolerance is crucial, especially for retirees and HNWIs. It helps you make decisions that align with both your financial goals and emotional comfort with market volatility. Getting this balance right is important—you want to ensure security, but at the same time, you don’t want to miss out on potential growth during retirement.

In this article, we’ll break down what investment risk is all about, how to figure out your own comfort level with risk, and some simple strategies to help you manage it. By the end, you'll have a better idea of how to balance risk with security as you plan for the future.

What Is Investment Risk?

When we talk about investment risk, we’re really talking about the possibility of losing money. Some investments, like stocks, can give you higher returns, but they also come with more risk—their value can drop quickly. On the other hand, bonds or real estate are usually more stable, but their potential for growth is often slower.

For retirees and HNWIs, understanding these differences is key. At this stage, you're likely more focused on preserving your wealth while still getting some growth. That’s why it’s important to assess your comfort level with risk before deciding where to put your money.

This is where risk tolerance comes into play. How comfortable are you with the idea of your portfolio's value fluctuating in response to market changes? This will heavily influence where and how you allocate your investments. Without a clear sense of your risk tolerance, it's easy to either take on too much risk—leading to unnecessary stress—or too little, missing out on opportunities for growth.

Understanding Risk Tolerance

Risk tolerance is basically how much market fluctuation you can handle without panicking. Everyone has a different threshold, and factors like your age, financial needs, and emotional responses to market changes all play a role in determining it.

For example, a retiree may feel less comfortable with high-risk investments because they’re relying on a steady income for living expenses. Meanwhile, an HNWI might be willing to take on more risk if they have extra wealth that they can afford to lose without it affecting their lifestyle.

Before making any decisions, it's important to take a step back and ask yourself: How much loss can I tolerate before I start worrying? That will give you a good starting point to figure out the right amount of risk.

Learn more here: Pros and Cons of Alternative Investments for Retirees

Types of Risk Tolerance

When it comes to investing, everyone has a different level of comfort with risk. Your risk tolerance is simply how much risk you’re willing to take with your money. Some people can handle more ups and downs in their investments, while others prefer to play it safe. Understanding where you fall on this spectrum is key to making smart decisions that align with your financial goals.?

Let’s look at the three main types of risk tolerance: conservative, moderate, and aggressive.

Conservative Risk Tolerance

A retiree with conservative risk tolerance is mostly concerned about keeping their savings safe. After years of working and saving, the priority now is to protect what they have rather than take big risks for higher returns. With a steady income being important, this person is likely to lean more toward bonds, which don’t swing as wildly in value as stocks. Bonds provide a predictable income stream, which is key for those who can't afford big losses. Stocks may still be a small part of the portfolio, but the focus is on keeping things stable. This approach lets them feel secure, knowing their investments won't lose too much if the market suddenly drops.

Moderate Risk Tolerance

If someone has a moderate risk tolerance, they’re comfortable with taking on some risk but still want to play it safe. Their portfolio will likely include a mix of bonds and stocks. The bonds offer stability, making sure there’s a safety net in case the stock market dips, while the stocks give them the opportunity to grow their wealth over time. This balance works well for people who don’t need immediate access to their money and can handle some market ups and downs. They know that while there might be some losses in the short term, their investments can still grow steadily over the long run.

Aggressive Risk Tolerance

An aggressive risk-taker is focused on growing their wealth, even if it means dealing with big market swings. For someone like this, the potential for higher returns outweighs the fear of short-term losses. Their portfolio would likely include a higher percentage of stocks, which can go up and down in value quickly. However, they’re willing to accept this because, over time, stocks tend to provide greater growth. For them, the ups and downs of the market are just part of the journey, and they’re in it for the long-term gains. Short-term dips don’t faze them because they know it’s a temporary step on the way to higher returns.

How to Gauge the Right Investment Risks for You

Assess Your Financial Goals

Start by identifying what you’re trying to achieve with your investments. Are you looking for steady income, long-term growth, or a mix of both? For retirees, the primary goal is often preserving wealth, while high-net-worth individuals might focus on growing their portfolio while maintaining stability. Clarifying these goals will guide you in determining how much risk is necessary.?

Let’s say you’re a retiree who’s no longer working. Your goal might be to generate a steady stream of income to cover your living expenses. In this case, you’d likely opt for lower-risk investments, like bonds or dividend-paying stocks, to preserve your wealth.?

On the other hand, if you’re a high-net-worth individual still building your portfolio, your goal might be long-term growth. You’d be comfortable taking on more risk with a larger portion of your money in stocks or real estate.

Evaluate Your Time Horizon

The amount of time you plan to stay invested plays a huge role in how much risk you should take. If you have a long investment horizon, you might have the ability to take on more risk because you can weather the market’s ups and downs. For retirees, the time horizon may be shorter, so investments should lean toward stability to ensure that funds are available when needed.?

If you’re in your early 60s and planning to retire in a few years, your time horizon is relatively short. You may not want to risk too much in volatile assets, so you’d shift your investments more toward bonds.?

But if you’re younger, say in your 40s, and have a couple of decades before you need the money, you can afford to ride out the ups and downs of the stock market. A portfolio with more stocks would make sense for long-term growth.

Understand Your Income Needs

Consider how much income you’ll need from your investments. If you rely heavily on them for your day-to-day expenses, it’s safer to lean toward more low-risk investments.?

On the other hand, if your portfolio is supplemental income or you don’t need immediate returns, you might be able to take on more risk for higher potential rewards.?

Imagine you’re retired and relying on your investment portfolio to cover everyday expenses, like groceries and bills. In this case, you’d likely lean toward lower-risk investments to ensure your income is stable and predictable.?

However, if you have other sources of income—such as a pension or rental properties—your portfolio might not need to generate immediate returns. This allows you to take on more risk for potentially higher gains over time.

Measure Your Emotional Tolerance

This is about how much market volatility you can handle without losing sleep. If you find yourself panicking or anxious when your portfolio loses value, you might be more suited to safer, steady investments. However, if you can stay calm and focused on long-term gains, even during market downturns, then a higher level of risk might be appropriate.?

If you’ve ever watched your investments drop by 10% and found yourself feeling anxious or considering selling everything, you might have a lower tolerance for risk. In this case, a more cautious approach, with a focus on bonds or other safer investments, would be better suited to your emotional comfort.?

On the flip side, if you’ve gone through market downturns before and felt confident enough to stay invested, even when things looked bad, you might be more suited to a higher-risk strategy.

Review Past Investment Experiences

Reflect on how you’ve handled investment risk in the past. Were you comfortable with market swings, or did they make you uneasy? Past behavior can offer valuable insights into your natural risk tolerance and help you make better decisions about future investments.?

Think back to a time when the market took a dive. How did you react? If you pulled your money out quickly to avoid further losses, that’s a sign you’re more cautious. But if you stayed the course and waited for your investments to recover, you likely have a higher tolerance for risk.?

Your past actions in volatile markets can give you insight into what type of investor you are and guide your future decisions.

Rebalance Regularly

Even after determining your risk tolerance, it’s important to review and adjust your portfolio regularly. Market conditions and life changes (like or significant financial milestones) can shift your risk tolerance. Rebalancing helps ensure your investments remain aligned with your evolving needs and goals.?

Let’s say you started with a portfolio that was 60% stocks and 40% bonds. Over time, as the stock market performed well, that ratio shifted to 70% stocks and 30% bonds.?

If you’re nearing retirement or your financial situation has changed, you might want to rebalance back to your original allocation to reduce risk.?

Rebalancing helps you stay aligned with your current risk tolerance and financial goals.

Consult a Fiduciary Financial Advisor

If you’re unsure about the level of risk that makes sense for your situation, speaking with a fiduciary financial advisor can be helpful. They’re obligated to put your interests first and can offer personalized guidance based on your financial situation and goals. By working together, you can develop a risk strategy that fits your needs without over-complicating the process.?

Maybe you’re unsure whether to increase your stock exposure or stick with your current allocation.?

By consulting a fiduciary financial advisor, you can get tailored advice based on your situation.?

They might suggest a strategy that helps you achieve your financial goals while keeping your risk at a comfortable level.?

For example, they could recommend a mix of income-generating investments and growth assets that meet your specific needs.

Key Risk Management Strategies

Managing risk is a big part of investing. It’s not just about choosing the right stocks or bonds—it’s about making sure your money is spread out in a way that fits your comfort level with risk. Whether you’re looking to protect your wealth or grow it, using the right strategies can make all the difference. Here are some practical ways to manage risk:

Diversification

Diversification is one of the easiest ways to manage risk. The idea is simple: don’t put all your eggs in one basket. By spreading your investments across different types of assets—like stocks, bonds, real estate, and cash—you lower the risk of losing a large chunk of your money if one investment doesn’t perform well. For example, if the stock market takes a hit, your bonds or real estate investments might hold steady and provide a cushion. Diversification helps smooth out the ups and downs and keeps your portfolio more balanced.

Asset Allocation

Asset allocation is all about deciding how much of your money to put into different kinds of investments, based on your risk tolerance. If you prefer a more cautious approach, you might allocate a larger portion of your portfolio to bonds and a smaller portion to stocks. On the other hand, if you’re more comfortable with risk, you could lean more toward stocks for the potential of higher returns. The goal is to create a mix that works for your financial situation and goals, helping you sleep better at night knowing your investments are aligned with your comfort level.

Reassessing Your Risk Over Time

Your risk tolerance isn’t something that stays the same forever. As life changes—whether it's entering retirement, facing major life events, or just the natural ups and downs of the market—your comfort with risk can shift. That’s why it’s important to review your portfolio regularly and make adjustments as needed. What felt right five or ten years ago might not be a good fit for you now. By reassessing your risk tolerance and tweaking your investments accordingly, you can stay on track and protect your wealth, while still positioning yourself for growth.

Setting Clear Financial Goals

Another key strategy is having clear financial goals. Knowing exactly what you’re investing for—whether it’s for retirement, a large purchase, or leaving a legacy—helps you decide how much risk to take. If your goal is to generate steady income for retirement, you might choose safer investments. But if you have long-term goals and can handle some ups and downs, you might take on more risk. Setting goals gives you a framework to manage risk effectively and make more confident decisions.

Dollar-Cost Averaging

This strategy involves investing a fixed amount of money at regular intervals, no matter what the market is doing. Whether the market is up or down, you continue to invest the same amount. Over time, this approach helps reduce the impact of market volatility because you’re buying more shares when prices are low and fewer when prices are high. It’s a simple way to stay disciplined and avoid trying to time the market, which can be risky and stressful.

Maintaining Liquidity

It’s important to keep a portion of your portfolio in liquid assets—investments that can easily be converted to cash. This could be savings accounts, money market funds, or short-term bonds. Liquidity ensures that you have quick access to cash if an emergency arises or if you need to make a big purchase. It also gives you flexibility to take advantage of investment opportunities without having to sell off your long-term investments at a bad time.

Conclusion

In the end, how much investment risk you should take comes down to your personal comfort level and financial situation. It’s important to understand where you stand when it comes to risk, especially as a retiree or HNWI, so you can make informed decisions that balance security with growth. Remember to reassess your risk tolerance regularly and adjust your strategies as your circumstances change.

Disclaimer:

Landsberg Bennett is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Advisory services are offered through Hightower Advisors, LLC. All information referenced herein is from sources believed to be reliable. Landsberg Bennett and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.