Financial Comfort Optimised
Written and accurate as at: Apr 04, 2024 Current Stats & Facts
If you've dabbled in investing, you've likely heard of risk appetite and risk tolerance. If not, you may be familiar with being complacent versus living in survival mode. While some of these terms seem interchangeable, understanding their differences may be the key to boosting your investment strategy. Today, we're taking these financial concepts further by applying risk management to the psychology around your comfort zone.
Identifying your risk appetite is fundamental when initially meeting with your financial adviser. This is achieved through questions about your financial goals, investment horizon, and financial literacy. Based on your response, a portfolio is assembled to meet your long-term objectives without causing you unnecessary stress or discomfort.
In other words, your financial advisor acts as a comfort zone detector. They do this because when you remain in your comfort zone, your intuition, confidence, passion, success, abundance, fulfilment, connection, and creativity become more accessible.
"The Comfort Zone is not a static place. If we allow it, it will continually grow and expand, always becoming more."
For context, Kristen Butler highlights the Three Life Zones: complacency, comfort, and survival. Many of us think of complacency when we think about our comfort zone. Still, when we are living in complacency, we are hardly comfortable. The complacency zone is often characterised by 'I don't want to do it because it may lead to disappointment'. However, with no risk, there is no gain.
At the other end of the spectrum is the survival zone. You want to avoid this zone because even though things may work out, the effort is high, and the return is unpredictable. People in the survival zone may believe that 'stress equates to achieving goals and being on the right track'.
When we apply these concepts to investment, we want you to remain in your comfort zone. It would help if you didn't avoid risk, but we don't like the risks to keep you up at night. It's also worth noting that risk appetite is a snapshot and may shift as your life circumstances do.
While risk appetite provides an individual blueprint for approaching investment, your risk tolerance makes real-world execution feasible. Tolerance gives insight into how you may react to unexpected market nosedives and lucrative yet risky investment opportunities.
Unlike risk appetite, risk tolerance is dynamic. It's influenced by many factors, from past investment experiences to typical stress responses. It reveals your comfort level with risk, allowing for real-time adjustments to your investment strategies.
So, why does this matter? Simply put, if there's a significant disconnect between your risk appetite and demonstrated risk tolerance, your investment strategy may need recalibration. You may either be too anxious about your investments or not reach your financial objectives as efficiently as possible. As mentioned earlier, we need you to remain in your comfort zone without creeping into survival territory where stress is high and outcomes are unreliable.
In summary, risk appetite and risk tolerance shape robust investment strategies by keeping you in your comfort zone. Your risk appetite helps you develop the initial game plan. Still, your risk tolerance ensures you can overcome inevitable bumps in the financial road.
Understanding these concepts isn't just about improving your financial literacy; it's about the tangible implications you can apply to your investment journey today. By having a holistic understanding of these financial concepts, you can become more attuned to your comfort zone and, as a result, improve and maintain your investment strategy.