Determine Your Risk Tolerance

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Determine Your Risk Tolerance

According to Investopedia, risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. Each individual has a risk tolerance that shouldn’t be ignored. Any good stock broker or financial planner knows this, and they should make the effort to aid you determine what your risk tolerance is. Then, they should work with you to get investments that don’t exceed your risk tolerance.

Determining one’s risk tolerance involves various different things. First, you require to know how much money you’ve to invest, and what your investment and financial goals are.

For example, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you require to have a high risk tolerance – as you’ll require to do a few aggressive – risky – investing in order to reach your financial goal.

On the other side of the coin, if you’re in your early twenties and you would like to begin investing for your retirement, your risk tolerance will be low. You may afford to watch your money grow slowly over time.

Realize naturally, that your want for a high risk tolerance or your require for a low risk tolerance actually has no bearing on how you feel about risk. Again, there’s a lot in determining your tolerance.

For example, if you invested in the stock exchange and you watched the movement of that stock regular and saw that it was dropping slightly, what would you do?

Would you sell out or would you let your money ride? If you’ve a low tolerance for risk, you’d prefer to sell out… if you’ve a high tolerance, you’d let your money ride and see what happens. This isn’t based on what your financial goals are. This tolerance is based on how you feel about your money!

Again, a good financial planner or stock broker should aid you determine the level of risk that you’re comfortable with, and aid you select your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all linked together.

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January 06 2009 02:40 am | Personal Finance

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