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.
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