By Martina Rexrode
Image from: Lynda.com
What to Consider When Determining Your Risk Tolerance
Before you dive into a major financial decision, consider the weight of your risks vs. rewards. This simple equation can assist in decisions of all kinds, especially because risk tolerance can be a particularly personal thing.
Depending on factors including your age and current financial situation, you could be more comfortable with taking risks if you are in your 20s with decades longer to stop and start over again than if you are approaching your late 40s or 50s. A younger adult in their college years up through their early 50s has a safe amount of time until they will need the money for retirement or any health emergencies that might come up. This concept of thinking is referred to as a “time horizon”. Time horizons put into perspective the amount of risk that would be most comfortable for specific age groups based on their years until retirement.
Another factor to consider when determining risk tolerance is your risk capital. Risk capital is described as the amount of money you have available to invest or trade that will not directly affect your personal life if it was lost. In simpler terms, this means that if you enter an investment with little capital, it will take much longer to recover from a loss than if you had gone into it with moderate or excess capital.
Risk tolerance varies from person to person, so yours will most likely be significantly different from that of your peers. Don’t let others influence your level of risk taking. Before you are set on a decision, first allow yourself to compare the pros and cons of your planned investment. Frontier Wealth Management suggests that you ask yourself three things: when you will need the money you’re going to invest, how emotionally prepared you are to handle a high level of risk followed by high stress, and what other assets you possess to fall back on if an investment goes south.
If you’re going to take away anything from my words, let it be this: Don’t go in without a plan.
For more information on risk tolerance, check out this short video: https://youtu.be/mfeqH92z9Ic
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