What is your risk tolerance? How does that affect what you invest in? Make sure you know the answers to this questions as this will make you choose the right investments for you. This will increase your chances for reaching your financial goals.
Risk tolerance means exactly that your tolerance for risking your money. It is a measure of how willing you are to risk your money for a return that is higher.
If you have high risk tolerance you are considered an aggressive investor willing to risk your cash for more potential profits. On the opposite spectrum is the low tolerant investor also known as a conservative investor willing to keep their capital intact and get lower returns. There are obviously investors found in the middle spectrum of medium tolerance.
It is of the utmost importance to know your tolerance level before you start your investing. Your adviser should make sure they help you out. This is to make sure they only look for certain investments that go along with your tolerance.
The following are several things to take into consideration when you are determining your risk tolerance:
1) You need to figure out how much money you will use for your investments and how that relates to your total net worth. For example if you plan to use 75% of all your money your tolerance will probably be different than if you were going to invest 5% of your money. It will probably be lower in the former example and higher in the latter example.
2) What are your financial goals? Are you middle aged and looking for retirement money? You would probably have a high tolerance as you will be aggressively trying to make money in a short time. Where as if you are a 20 year old with all the time in the world then you might have a lower risk tolerance as you have time for the investment to grow.
3) Your age is a big factor in determining how much risk you can take. For a retiree of 70 for instance you will probably have a lower risk level as if you lose your money you do not have much time to regain your losses. Whereas if you were a 25 year old you have more time to recoup losses so you can afford a higher risk tolerance
Your risk tolerance is usually not really about what you think about risk more about how you feel about your money. If you saw a stock investment you have invested in start to drop what would you do? Would you wait and see what happens or quickly sell it. If you are someone with a low tolerance you would quickly get out but if you had a High tolerance you would wait and see what happens. Thus does not have to do a lot with your financial goals as much as your feelings about your money.
Your financial planner, advisor or stock broker is supposed to help you with this question. They should help you determine your level of risk and then choose the right investments which complement your risk tolerance
Risk tolerance is found by assessing your financial goals, your age and also your feelings towards your money. Also note that your risk tolerance is only one of the factors to consider when looking into what you invest in. Its just one piece of the puzzle so research more and keep informed.
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