When you’re ready to invest, you’ll likely consider the amount you have available to invest and what you want your financial gain to be over a specific period. You may be quite specific about these factors, or maybe you care only about the bottom line and how much you stand to lose or gain.
For your own peace of mind, it’s wise to determine your level of risk tolerance for your investments. Understanding your own wants and desires related to your finances will largely determine how you decide to allocate your funds.
Consider your answers to the following questions to help you determine your level of risk tolerance regarding investments:
1. How much are you willing to risk? Based on how much money you currently have, how much of it are you willing to risk in an investment?
- Of course, some people will say, “no problem, let’s go for it” regardless of how much they’re worth. Others, however, will carefully evaluate their financial worth and be willing to risk only a certain percentage of their overall wealth.
2. Are you okay with no cash flow? Can you handle no investment cash coming in for a while if a large investment goes south?
- If so, how long can you put up with this condition? Being able to live with no money coming in is difficult for most people. How well you can accept this situation is an important determinant of your risk tolerance.
3. Is an investment “doable” in your eyes? If you’re considering a specific investment, do you feel the investment is one you could make without hesitation?
- Each person has his own thoughts and ideas about the type of investments in which he has confidence. Your investment risk tolerance depends on the rigor with which you evaluate your potential investments.
4. What is your experience in investing? Are you able to adjust to money losses in the short term to gain funds over the longer term?
- If you’re 40 years old and you’ve been investing for 20 years, you’ve got 2 decades of experience under your belt. You can most likely trust in your prior investment experience when it comes to making investment decisions. Plus, 20 years of investing builds a lot of confidence, which strengthens your risk tolerance.
- But what if you’re 35 years old and making your first investment? If this description is closer to your situation, your risk tolerance will be lower and for good reason.
5. How old are you and how much are you worth? These factors are also important when it comes to making difficult decisions about how to invest your money.
- When you’re younger, you may have more tolerance for loss because you have more time to make up any losses before you retire.
- Also, at any age, the higher your net worth, the easier it may be to tolerate a loss of a small percentage of your worth.
It’s wise to know your level of investment risk tolerance. Because making investments are so integral to you and your family’s financial future, it’s important you be intimately connected with your feelings and ideas about investing your money and the risks involved.
If you seriously ponder the above questions and your responses, you’ll be able to determine successfully your risk tolerance for investing.