What is the best way to determine your portfolio's risk tolerance?

1 Assess your goals and time horizon

The first step is to clarify your investment objectives and how long you plan to hold your properties. Are you looking for income, growth, or both? How much income do you need to cover your expenses and obligations? How much growth do you want to achieve your long-term targets? How soon do you need to access your capital? Your goals and time horizon will affect how much risk you can afford to take and how much return you need to generate.

2 Evaluate your financial situation

The next step is to review your current and projected income, expenses, assets, liabilities, and cash flow. How stable and diversified are your sources of income? How flexible are your expenses and obligations? How much debt do you have and how easily can you service it? How much savings and emergency funds do you have? How much liquidity do you need in your portfolio? Your financial situation will influence how much risk you can withstand and how much cushion you have to absorb losses.

3 Understand your risk capacity and risk attitude

The final step is to measure your risk capacity and risk attitude. Risk capacity is the objective ability to handle risk based on your financial situation. Risk attitude is the subjective preference for risk based on your personality and emotions. You can use various tools and questionnaires to assess your risk capacity and risk attitude, such as the Risk Tolerance Questionnaire from Vanguard or the Risk Profile Questionnaire from FinaMetrica. These tools will help you identify your risk profile, which is a combination of your risk capacity and risk attitude.

4 Adjust your portfolio accordingly

Once you have determined your risk tolerance, you can adjust your portfolio accordingly. You can use the asset allocation model that matches your risk profile, or create your own custom mix of property types, locations, sectors, and strategies. You can also use diversification, hedging, leverage, and insurance to manage your portfolio risk and return. You should review your portfolio regularly and make adjustments as your risk tolerance changes over time.

5 Seek professional advice

Determining your portfolio's risk tolerance is not a one-time exercise. It is an ongoing process that requires constant monitoring and evaluation. You may also face complex and uncertain situations that challenge your risk tolerance. That's why it is advisable to seek professional advice from a qualified financial planner or investment advisor who can help you assess your risk tolerance, design your portfolio, and guide you through market fluctuations.

6 Learn more about portfolio risk management

Determining your portfolio's risk tolerance is an essential part of portfolio risk management. Portfolio risk management is the process of identifying, measuring, and controlling the risks that affect your investment performance. It involves using various tools and techniques to optimize your portfolio risk and return, such as diversification, asset allocation, hedging, leverage, insurance, and rebalancing. To learn more about portfolio risk management, you can read books, articles, blogs, podcasts, and webinars on the topic, or enroll in courses or workshops that teach you the skills and strategies of portfolio risk management.