Each and everyone of us has a certain tolerance to differing levels of risk. When it comes to your investment and market risk tolerance, this should be closely adhered to, and never ignored. Any financial planner or broker knows this and should reiterate to you. Any quality stock recommendation software, system, or newsletter should also stress this fact. So naturally, these parties should be working closely with you to locate the appropriate stock investments that mirror this tolerance. There are some important factors that should be considered when gaging your market risk tolerance.
Now, to properly determine an investor's market risk tolerance, you have to look at some pretty logical, yet important things:
- First, what kind of financial outlay can you put forth towards investments? Logically, more money makes more money.
- Second, what are you ultimate financial goals? If you're investing later in life and you want to one day(more sooner than later) have enough to retire, you may need to take riskier, increasingly aggressive steps to reach you goals. Conversely, if you are just out of college, you have a lot more time to carefully plot your financial roads and watch your money slowly and safely accumulate.
Keep in mind, that your need for a higher or lower investment risk tolerance, in order to reach your goals, does not reflect your personal feelings about taking risks. For example, are you the type of person to stick with a stock when it starts to depreciate a bit and ride it out, or do you sell out completely and hang on to however much profit you previously managed? This is a very important lesson, because it illustrates the fact that you personal risk tolerance can often have very little to do with what is necessary to reach your goals. These “emotions" are your true feelings about your money.
So, to quickly recap:
- Any quality broker, software, system, or service should take into consideration your level of risk tolerance.
- They should encourage the development of your risk tolerance, based on your personal habits and feelings about money, as well as your financial goals, and help you deliniate the two when making investment decisions.
- This permissible level of risk is directly tied into realistically reaching your financial goals and the very real chance of losing money.
Short-changing yourself here will prove irrevocably detrimental to your financial future. Take the time to properly evaluate your financial position and your desired level of market risk tolerance. Realistically examine your financial goals and plot the appropriate course of action.
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