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Risk tolerance

In order to know where to place your money, you need to know your risk tolerance first. If you are a risk taker, you can invest in stock, forex, or option. But if you are not a risk taker, you should only invest in bond, or mutual fund.

Author: ian sani
Date: Jul 15, 2010 - 12:25:09 PM

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In order to know where to place your money, you need to know your risk tolerance first. If you are a risk taker, you can invest in stock, forex, or option. But if you are not a risk taker, you should only invest in bond, or mutual fund.

Each individual has their own risk tolerance. So your risk tolerance might be different from your friend's risk tolerance. This means that you should not follow your friend's investment without knowing his and yours risk tolerance. You should know your risk tolerance before investing.

Determining your risk tolerance involves several things. First, you need to know how much money you have to invest, and what your financial goals are.

For example, if you plan to retire in twenty years, and you do not have any savings, you need to have high risk tolerance to achieve your financial goal. This means you need to invest aggressively, which is risky. But you need to do this to meet your goals in a short time. On the other side, if you are still young you can invest slowly because you still have a lot of time. You can watch your money grow slowly over time.

Another example, a 70-year-old retired will generally have a lower risk tolerance than a 30-year-old executive. The old guy will make sure he is not taking too much risk. If he lose his money, he won't be able to earn more because he's not working anymore. The 30-year-old executive might have higher risk tolerance, because he has a longer time frame to make up for any losses he may incur.

From another view of point, you can find out your risk tolerance by looking at the amount of money you feel you can lose. If you invest $10,000 in stock, and lose 1% a day which is $100, are you comfortable with this. If yes, then you have high risk tolerance.

In the internet there are many test that you can take to know your risk tolerance. It will have several question  designed to measure your ability to tolerate investment risks.

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