How much risk can you take in investing your money? Although there is investment risk involved, you must determine your risk tolerance. You must remember that your investment do not exceed your risk tolerance.
You can determine one’s risk tolerance through the following examples. First, determine how much money you have to invest, and what your investment and financial goals are.
- If you are planning to retire in ten years, and you have no savings for retirement, you need to have a high risk tolerance. This is because you will need to do some aggressive and risky investing move in order to reach your financial goal.
- If you are in young 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.
Secondly, determine the level of risk that you are comfortable with, and help you choose your investments accordingly. For example , 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!
In short, your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. These two are both tied up.