Establishing your risk tolerance involves many different things. To begin, you need to determine how much money you want to invest and what your investment and financial goals are.
The initial step involved in investing is to establish one’s risktolerance. Any good stock broker or financial planner is aware of this and they are obliged to make the effort to help you conclude what your risk tolerance is. Then they should help you identify investments that do not exceed your risk tolerance.
Determining one’s risk tolerance involves multiple different things. First, you need to know how much money you have to invest and what your investment and financial aspirations are.
For example, if you plan to retire in ten years, and you’ve not saved a single cent towards that end, you need to have a high risk tolerance – because you will have to do some aggressive – high-risk – investing in order to reach your financial objective.
However on the other side of the coin, if you are just starting out and you want to start investing for your retirement, your risk tolerance will be extremely low. You can afford to watch your money prosper gradually over time.
Naturally you need to understand that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. To reiterate, there is a lot in determining your tolerance level.
Let’s take an example, if you invested in the stock market and you watched the movement of that stock everyday and saw that it was falling slightly, what would you do?
Would you sell off or would you let your money be? If you have a low tolerance for risk, you would want to sell out… if your acceptance of risk is higher, you would let your money ride and not be overly concerned. This is not based on what your financial goals are. This is entirely about your level of feeling secure.
Again, a good financial planner or stock broker will help you determine the level of risk that you are comfortable with and help you pick your investments fittingly.
Your risk comfort zone should be based on what your financial goals are and how you would react to seeing your investments diminish. It’s all tied in together.
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