How to Determine Your Investment Risk Tolerance
With the volititlity of the stock market, many people's investments, 401ks, stocks, bonds and pensions fluctuate like never before. One thing many people need to consider when investing is what they are willing to risk as part of their overall portfolio. For a basic overview of investment risk tolerance, the following provides some insight.
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Instructions
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First of all, determine your financial goals. You have to know what are you investing your money for. Are you saving for retirement, college education or a new home or car. Once you know, you'll be able to decide just how much risk you can take given the circumstances.
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Next, you need to determine the amount of time you have to invest. If you're investing for retirement and you're 35 years old, you have another 30 to 40 years to invest. If you're saving for a child's education, the amount of time you have changes your approach drastically. Time factors can change risk tolerances.
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Ask yourself if you are willing to see a high fluctuation of the value of your funds in the time you have to invest? If you're not, you have a very low risk tolerence, which lends itself to seeing a more steady growth over time with very little loss.
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The more aggressively you invest in aggressive growth funds, international funds and high-yeild stocks shows your risk tolerence to be very high. This approach lends itself to see more volatile, ridged growth and slightly higher risks.
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Aggressive investing opposed to conservative investing will tell you where you are in tolerating the fluctuation of growth in your portfolio. Higher risk, higher reward. Lower risk, lower yield. A more conservative approach hopefully will lead to a more steady growth. Do your homework and know what you are investing in before investing and be comfortable doing so.
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Tips & Warnings
Read all prospectuses and study what you are in investing in. Look at the historical record of the instrument you're considering investing in. Consult a financial planner before investing.
Realise NOTHING is guaranteed to grow in the market.
References
- Photo Credit http://www.azmythfinancial.com/Investing%20Decisions.jpg
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Comments
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Heather Schulte
Dec 09, 2008
Sound advice. -
Pillain
Oct 17, 2008
A logical, step by step process. Thanks!
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JoyNmyHeart
Oct 16, 2008
Great article! Very informative. Thanks Thims!
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Gourmet2Go
Oct 15, 2008
Well written and informative, thanks for a great read!
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agille
Oct 15, 2008
Good article Thims, its true that investors need to determine their stomach for risk. They also need to determine the longevity of their investments; this will obviously dictate how you should distribute your portfolio and when you should make changes to the distribution. Over the long haul the market grows pretty well; you just have to be able to survive the long haul!
