Understanding Your Risk Tolerance
One of the important things you need to be aware of when it comes to investing is your risk tolerance. You should know how much risk you can take — and this includes your emotional tolerance for risk as well as the tolerance your investment portfolio has.
Risk tolerance: Financial risks
It is often easier to figure out your financial risk tolerance. Before you add an investment to your portfolio, you run the numbers. Financial risk tolerance is how much you can afford to lose, and still be in good shape financially. For those who can afford to lose a great deal of money (or for those who are younger and have more time to make up for losses), the financial risk tolerance is higher. The key is to avoid taking on risks that will leave your finances in ruins.
Risk tolerance: Emotional risks
While it would be nice to say that investing is something that is objective and purely numbers-based, you know this isn’t the case. Emotions play a part in your ability to invest. Some people, even those with a high financial risk tolerance, are worriers. Emotionally, they are concerned about losing money and worry that they picked the wrong investments. If the emotional stress is too great for you, then you need to adjust your investment strategy accordingly.
Progressive investing strategy
In order to handle both the financial and emotional risk tolerance you have, you can engage in progressive investing. In this strategy, you start out with very conservative investments that have lower risk. You get used to managing those investments and learn how investing works. As you gain more experience and knowledge, you can start to slowly add riskier investments.
There is no one right way for everyone to invest. You need to evaluate your own investing strategy and style, and work with what is comfortable for you.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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