Assessing Your Risk Tolerance Properly.
Stop panic selling in bear markets.
Good morning investors,
Does hearing the word “risk” excite or worry you? Does investing give you a thrill or make you have a hard time sleeping at night? Are you trying to get rich fast or create wealth slowly?
Asking yourself these types of questions and then fairly evaluating your behaviors is the first step in assessing how much risk you can handle in the financial markets.
What is Risk Tolerance?
Risk tolerance is a measure of how much risk an investor can take on without being adversely affected by the potential losses. The higher the risk tolerance, the more likely an investor will be willing to take on higher levels of risk.
An individual's ability to withstand financial loss is called "risk aversion" and is measured inversely as "risk tolerance." A low level of risk aversion means that someone has a high level of risk tolerance and vice versa.
It’s all about how much you want to make and how much you are willing to lose. Risk can present great opportunities to make money but inevitably is followed by the chance of losing it too.
Your ability to handle yourself during unfavorable times is what will make you stand out & successful compared to other investors.
Aligning your Goals with Risk
The primary factor (in my opinion) in determining your risk tolerance is evaluating your time horizon.
Your time horizon is determined by what you are saving for & how long you plan to save—knowing these two things will significantly affect what type and how you allocate your assets.
For example, saving for a new car will take less time than saving for your future kid’s college.
As a general rule of thumb, the more extended amount of time you have on your horizon, the more risk you can take and vice versa. This is because you have a longer amount of time to wait for your investments to recover if they were to go down.
So keep in mind that whatever goal you are saving towards needs to be adequately assessed to fit your risk tolerance in investing.
Now that you have a general idea of your risk tolerance, you’re ready to look into assets that fit your agenda, like stocks, bonds, real estate, or maybe even crypto, just to name a few.
Whatever you decide to invest in, as long as it aligns with your goals and your risk tolerance, you’ve already won half the battle.
If you learned something from this artic, consider sharing it with a friend who doesn’t understand risk tolerance.
As always, have a great day, and remember to live in the moment.
