I’m going to give some pointers below to help you determine your risk tolerance, but I have one thing that I want to say first.
I’ve read tons of books about creating wealth, and all of them stress that “NO ONE IS GOING TO UNDERSTAND YOUR RISK MORE THAN YOU WILL.” I couldn’t agree more. This is why I like to empower myself so I can make my own investment choices. Think about it. Your investment broker down the street has pressure to sell certain investments. He has weekly meetings with his boss asking about updates on numbers. Therefore, you certainly have a great chance of becoming a “victim” of salesmen. They may sell you investments that are in the best interest of THEIR PAYCHECKS, not what necessarily is in your best interest. Even though you may have earned a promising 18% last year, how much did you really earn? You may have actually lost money. Competeing funds may have delieverd returns of 22%. Not only did you lose out on 4%, but you have fees up the wazoo that reduce your piece of the pie even more.
Risk refers to the uncertainty of an investment’s return. Some investments like savings accounts have guaranteed interest returns, so they are considered to have no risk. Stocks, mutual funds, etc. on the other hand, carry a lot of risk.
The return on any particular stock is always uncertain. Depending on the performance of the company, a company’s stock could triple in value or could lose all value, and you end up with nothing.
Volatility is the degree in which an investment tends to fluctuate over time.
Risk & Volatility tend to correlate with investment returns. So, for example, the higher the risk of an investment, the higher the potential returns, and the higher the Volatility.
