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Each individual has a risk tolerance that should not
be ignored. Any good stock broker or financial planner knows this, and they
should make the effort to help you determine what your risk tolerance is. Then,
they should work with you to find investments that do not exceed your risk
tolerance.
Determining one’s risk tolerance involves several
different things. First, you need to know how much money you have to invest,
and what your investment and financial goals are.
For instance, if you plan to retire in ten years, and
you’ve not saved a single penny towards that end, you need to have a high risk
tolerance – because you will need to do some aggressive – risky – investing in
order to reach your financial goal.
On the other side of the coin, if you are in your
early twenties and you want to start investing for your retirement, your risk
tolerance will be low. You can afford to watch your money grow slowly over
time.
Realize of course, 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. Again, there is a lot in determining your tolerance.
For instance, if you invested in the stock market and
you watched the movement of that stock daily and saw that it was dropping
slightly, what would you do?
Would you sell out or would you let your money ride?
If you have a low tolerance for risk, you would want to sell out… if you have a
high tolerance, you would let your money ride and see what happens. This is not
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
help you determine the level of risk that you are comfortable with, and help
you choose 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 tied in together.
Knowing what your risk tolerance and investment style
are will help you choose investments more wisely. While there are many
different types of investments that one can make, there are really only three
specific investment styles – and those three styles tie in with your risk
tolerance. The three investment styles are conservative, moderate, and
aggressive.
Naturally, if you find that you have a low tolerance
for risk, your investment style will most likely be conservative or moderate at
best. If you have a high tolerance for risk, you will most likely be a moderate
or aggressive investor. At the same time, your financial goals will also
determine what style of investing you use.
If you are saving for retirement in your early
twenties, you should use a conservative or moderate style of investing – but if
you are trying to get together the funds to buy a home in the next year or two,
you would want to use an aggressive style.
Conservative investors want to maintain their initial
investment. In other words, if they invest $5000 they want to be sure that they
will get their initial $5000 back. This type of investor usually invests in
common stocks and bonds and short term money market accounts.
An interest earning savings account is very common for
conservative investors.
A moderate investor usually invests much like a
conservative investor, but will use a portion of their investment funds for
higher risk investments. Many moderate investors invest 50% of their investment
funds in safe or conservative investments, and invest the remainder in riskier
investments.
An aggressive investor is willing to take risks that
other investors won’t take. They invest higher amounts of money in riskier
ventures in the hopes of achieving larger returns – either over time or in a
short amount of time. Aggressive investors often have all or most of their
investment funds tied up in the stock market.
Again, determining what style of investing you will
use will be determined by your financial goals and your risk tolerance. No
matter what type of investing you do, however, you should carefully research
that investment. Never invest without having all of the facts! Learn how to invest like Buffet.
Disclaimer: The information provided
here is only for informative purposes and nothing more. It is not in any
way to be construed as authoritative. Always consult your financial advisor
before taking any decision. It is informed to the people that this
information that is provided here is not to be acted upon. In spite of our
advise, if any person acts upon the contents of this web site and incurs a
loss, they do it on their own risk. We are not to be held responsible for
any loss, incorrect information etc.
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