Each person has a risk tolerance that must not be disregarded. Any good stock broker or financial planner knows this, and they must make the effort to assist you determine exactly what your risk tolerance is. Then, they ought to work with you to find investments that do not exceed your risk tolerance.
Figuring out one’s risk tolerance involves a number of different things. First, you need to know how much cash you need to invest, and what your financial and investment goals are.
If you intend to retire in ten years, and you’ve not stashed away a single penny towards that end, you must have a high risk tolerance– due to the fact that you will need to do some aggressive– risky– investing so that you can reach your monetary goal.
On the other side of the coin, if you are in your early twenties and you wish to begin investing for your retirement, your risk tolerance should be low. You can afford to watch your financial assets grow slowly over the years.
Understand, of course, that your requirement for a high risk tolerance or your requirement for a reduced risk tolerance really has no bearing on how you feel about risk. Once again, there is a lot in quantifying your tolerance.
For instance, if you invested in the stock market and you witnessed the movement of that stock daily and saw that it was dropping a little, exactly 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 and see what happens. This is not based upon what your financial goals are. This tolerance is based on how you feel about your cash!
Once again, a good financial advisor or stock broker ought to help you determine the level of risk that that is acceptable to you, and help you choose your investments appropriately.
Your risk tolerance ought to be based upon exactly what your investment goals are and how you feel about the possibility of losing your money. It’s all linked together.