Each individual has a risk tolerance that you should not ignore. Any good stockbroker or financial planner knows this, and they should make an effort to help you determine your risk tolerance. Then, they should work with you to find investments that do not exceed your risk tolerance.
Determining one’s risk tolerance involves several different things. First, you need to know how much money you have to invest and your investment and financial goals.
For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you need to have a high-risk tolerance – because you will need to do some aggressive – risky – investing to reach your financial goal.
On the other side of the coin, if you are in your early twenties and want to start investing for your retirement, your risk tolerance will be low. As a result, you can afford to watch your money grow slowly over time.
Realize, of course, that your need for a high-risk tolerance or your need for a low-risk tolerance has no bearing on how you feel about risk. But, again, there is a lot in determining your tolerance.
For instance, if you invested in the stock market and watched that stock’s movement 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!
Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with and help you choose your investments accordingly.
Your risk tolerance should be based on your financial goals and how you feel about the possibility of losing your money. It’s all tied in together.