Investing 101: What is risk tolerance?

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If you are thinking of investing, then we would definitely suggest that you take a look at your specific risk tolerance. No form of investment comes without any risk. How much you are willing to risk is important in determining the type of investment best suited for you.

You should first look into the amount of money you are willing to risk.

There are additional factors to consider such as your age, income, amount you can invest, and your investment goals.

All investments involve some degree of risk and knowing their risk tolerance level helps investors plan their entire portfolio, determining how they invest. Based on how much risk they can tolerate, investors can be grouped into 3 categories: aggressive, moderate, and conservative. One way to figure out your degree of risk is via tools available online (i.e., questionnaires).

One factor that affects risk tolerance includes the specific period of time for an investor. Having a financial goal with a long-time span, an investor may have greater returns by carefully investing in higher-risk assets, such as stocks. Conversely, lower-risk cash investments may be appropriate for short-term financial goals.

An investor’s future earning capacity, and the inclusion of other assets such as a home, pension, or an inheritance affect risk tolerance. An investor can take greater risk with investable assets when they have other, more stable sources of funds available. Additionally, investors with a larger portfolio may be more tolerant to risk, as the percentage of loss is much less in a larger portfolio when compared to a smaller portfolio.

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