When people think about risk tolerance, they often associate it with retirement planning or adult investing decisions.
In reality, risk tolerance plays an important role when investing for children as well. Custodial accounts like UTMAs are often used for long-term goals, which makes understanding risk and time horizon especially relevant.
When investing on behalf of a child, the amount of risk a family can reasonably take often depends on how long the money is expected to stay invested and how old the child is.
What Risk Tolerance Means
Risk tolerance describes how comfortable an investor is with changes in the value of their investments. It reflects both emotional comfort and practical ability to stay invested during periods of market volatility.
As outlined in this Merrill article explaining risk tolerance and Investopedia’s overview of risk tolerance, risk tolerance is shaped by several factors, including time horizon, financial goals, and the ability to recover from losses.
These concepts apply whether someone is investing for themselves or on behalf of a child.
Time Horizon Shapes Risk Decisions
Time plays a central role in how risk is experienced.
When investing for a very young child, the timeline may extend 15 to 18 years or longer. With that much time available, short-term market fluctuations tend to have less impact on long-term outcomes. This longer horizon can allow portfolios to accept more risk in pursuit of growth.
As a child gets older, the timeline naturally shortens. Funds may be needed sooner for education, housing, or early adult expenses. At that stage, reducing exposure to volatility often becomes more appropriate.
Because of this, the same investment approach may not make sense at every age. Risk tolerance often evolves as the child grows.
Risk Considerations For UTMA Accounts
UTMA accounts are commonly used to invest for a child’s future, which makes risk tolerance a key part of the strategy.
Early in a child’s life, portfolios are often positioned with a greater focus on long-term growth. Over time, many families choose to adjust that approach, gradually shifting toward more conservative allocations as the child approaches the age of majority.
The intention is not to avoid risk altogether, but to align risk with timing. Accepting too little risk early on can limit growth, while maintaining too much risk later can expose funds to unnecessary volatility when they may soon be needed.
There Is No Single Right Approach
Risk tolerance is personal, even when investing for children.
Two families investing for children of the same age may make different choices based on their financial situation, comfort level, and future plans. Some families are comfortable with market swings early on. Others prefer a steadier approach throughout.
What matters most is having a thoughtful framework that reflects time horizon and purpose, rather than reacting to short-term market movements.
Planning With Time In Mind
Investing for a child is a long-term process that benefits from periodic review.
Revisiting risk tolerance as a child grows can help ensure that investments remain aligned with changing timelines and goals. Rather than trying to predict markets, families can focus on building a strategy that adapts gradually over time.
You do not need to be perfect to invest thoughtfully. Starting early and adjusting along the way can make a meaningful difference.
Getting Started
Understanding risk tolerance is one part of building a long-term investing approach for children.
For families looking for a flexible way to invest for a child while considering time horizon and evolving risk needs, a UNest UTMA account can support that journey.
Educational Disclaimer
This blog is for educational purposes only and is not intended as investment advice. Investing involves risk, including the possible loss of principal. Families should consider their own financial situation and consult a qualified financial professional before making investment decisions.
