Why Is Your Tolerance To Risk Important To Your Investment Decisions
How willing are you to risk the loss of your money in order to get higher gains? Are you happy to risk your money for more profit potential or are you hesitant and less willing to risk your money? This is what is called your risk tolerance.
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 investors who are neither fully high or low tolerance, they are in the middle.
It is of the utmost importance to know your tolerance level before you start your investing. Yout planner should guide you in this decision. This is done to make certain that the investments made go together with what your risk tolerance is.
Take these things into mind when your are calculating your tolerance level:
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 be less in the first example and higher in the second example.
What do you want to achieve financially? Are you middle aged and looking for retirement money? You will be trying to make money quickly therefore you will have high tolerance for risk. When you are a 20 year old however you have time to go slow and be conservative and therefore have lower risk tolerance.
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. For example how would you act if you saw that one of your stock investments was dropping? What would you do sell quickly or wait to see what will happen. 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.
Make sure if you have a broker, planner or advisor that they help you with this decision. 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.
Wadzanai Nenzou is a investment expert. With years of experience in the finance markets. She loves movies, reading and self help books. She is passionate about changing the world. For her free forex course go to
www.learning-forex-traiding.com
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