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Why Is Your Tolerance To Risk Important To Your Investment Decisions

By: Wadzanai Nenzou

Risk tolerance is about your tolerance to losing your money. Its about the tradeoff between risking your money and getting higher profits

If you have high risk tolerance you are considered an aggressive investor willing to risk your cash for more potential profits. On the opposite spectrum is the low tolerant investor also known as a conservative investor willing to keep their capital intact and get lower returns. There are investors who are neither fully high or low tolerance, they are in the middle.

It is vital to know exactly what your level of tolerance is before you start investing. Your adviser should make sure they help you out. This is to make sure they only look for certain investments that go along with your tolerance.

Take these things into mind when your are calculating your tolerance level:

1) You need to figure out how much money you will use for your investments and how that relates to your total net worth. For example if you plan to use 75% of all your money your tolerance will probably be different than if you were going to invest 5% of your money. It will probably be lower in the former example and higher in the latter example.

What do you want to achieve financially? Are you a 50 year old needing money for retirement? You will be trying to make money quickly therefore you will have high tolerance for risk. Where as if you are a 20 year old with all the time in the world then you might have a lower risk tolerance as you have time for the investment to grow.

3) Your age is a big factor in determining how much risk you can take. For a retiree of 70 for instance you will probably have a lower risk level as if you lose your money you do not have much time to regain your losses. Whereas if you were a 25 year old you have more time to recoup losses so you can afford a higher risk tolerance

Your risk tolerance is usually not really about what you think about risk more about how you feel about your money. If you saw a stock investment you have invested in start to drop what would you do? What would you do sell quickly or wait to see what will happen. If you are not willing to lose your money then you would immediately get out but if you are not affected by the prospect of losing money then you would wait to see what happens. Thus does not have to do a lot with your financial goals as much as your feelings about your money.

Your financial planner, advisor or stock broker is supposed to help you with this question. They should help you determine your level of risk and then choose the right investments which complement your risk tolerance

Risk tolerance is found by assessing your financial goals, your age and also your feelings towards your money. Also note that your risk tolerance is only one of the factors to consider when looking into what you invest in. Its just one piece of the puzzle so research more and keep informed.

Article Source: http://www.newagelivingarticles.com

Wadzanai Nenzou is a investment expert. With years of experience in the finance markets. She loves movies, reading and self help books. She is passionate about changing the world. For her free forex course go to www.learning-forex-traiding.com

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