What is investment risk and how much risk should you assume? Simply stated, low risk investments are more stable, with a lower return on investment but more predictable activity. High risk investments can provide a much higher rate of return, but more likely to react with extreme highs and extreme lows, which includes an increased possibility of loss. And not all investments are purely high or low, black or white. Varying degrees of moderate risk investments are also available. And, just as no single investment vehicle should be selected, no single risk level should be selected.
After you identify the proper risk level for the majority of your investments, also allocate some funds to both slightly higher and lower levels of risk. Diversify.
Your personal risk tolerance level needs to be identified before investing your first dollar. If you choose to seek professional investment guidance, all credible stock brokers or financial planners are aware of this. Their expert analysis will determine what your risk tolerance level is. Then they will work with you to find the investments best suited to your personal goals.
If you decide to not use a professional investment service, and do you homework first. It is especially important you understand how investment risk relates to your personal investment goals. Determining your risk tolerance is just one of several important factors which need to be examined and balanced.
First, consider how much money you have to invest, and also anticipate your future funding contributions. Plus, identify your target goal, exactly how much money will you need. Next, determine the time remaining to reach your goal. All these factors combined will greatly influence your investment risk decision.
Are you savings for your first home in five years, or possibly college education for your children? Or, like the largest group of investors, are you preparing for retirement?
For example, if you are in your early twenties or thirties and you want to start investing for your retirement, your risk tolerance can be higher, with a large percentage of your investment chosen from a high risk category. When your investment has periods of downward activity, you will have enough time to wait out market corrections. .
What if your time to reach that goal is more near future rather than long term? Examples would be move into that new home in five years or college education for your children in ten years. Then you may want to select mostly moderate risk investments.
If you are in your forties or fifties and investing for your retirement income, many serious factors need to be balanced. If you did start your investment program years earlier, you definitely want very low risk investment selections, and keep those funds as safe as possible. However, if you are getting a late start, you now have fewer years to reach your goal and will need a very different approach. As well as the need to diversify your investments to include some moderate levels of risk, you may also need to modify your goals. Consider investments with levels of return which are safely obtainable within your time frame.
Another important factor is the emotional factor, as to how you feel about risk. Again, this will have a major impact in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell immediately, or would you watch your investment ride out the storm? If you have a low tolerance for risk, you would want to sell out. But if you have a high risk 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 what your financial goals, plus how you feel about the possibility of losing your money. All these factors are closely tied together. Then read and compare all you can about your selected investment, study the historical earning patterns and ratings, and years of operation. Become comfortable with your decision. If you do not feel completely secure in your own decision, definitely seek professional guidance.
