How much risk are you personally comfortable accepting with regards to investing?
To make sure you invest the way you are comfortable, find out what your risk tolerance is. Everyone should know.
How to determine your risk tolerance. Right, YOUR Risk Tolerance. Not your husbands, or your daughters, YOURS.
1. What is your time horizon? How long until you retire? Not how long until you WANT to retire, but the reasonable date when you will retire. How long do you plan to invest (for example, less than 5 years, 10 years, 20 years, 30 years or more). There is a direct correlation with time horizon and risk tolerance. The younger we are, the more risk we tend to be able to take, especially if you have more than 10 years until retirement. The more time you have, the more stocks you should invest in. Some people, like me, should invest for growth by buying stocks almost exclusively.
If you have a shorter time horizon, the lower your risk tolerance tends to be, understandably. This is because a short-term dip in the value of an investment might happen right as you planned to use that money to purchase more assets or make a large with drawl. Those with moderate time horizons, 5-10 years, generally have a moderate risk level and should invest for growth and income by investing in stocks, bonds and cash equivalents. Investors with low risk tolerances tend to be those that have short time horizons, 1-5 years. These investors should invest almost entirely for income by holding bonds and cash.
2. Personal Feelings. Another thing to factor into your willingness to take on risk, is how you feel personally about taking on risks and losing money. How willing are you really to watch your investments, your life savings, fluctuate up or down over time, based on market conditions?
If you avoid risk in your everyday life, and/or worry easily, I would suggest buying less risky investments, even if you have a long time horizon. Better to have your money in investments returning you something, than you fearing risk and not investing it and keeping it under your pillow. Consider investments that will fluctuate a bit, but have the potential to offer you higher returns in the long-term.
On the other hand, if you enjoy risk and don’t worry easily, if at all, you should feel comfortable taking risks if you’ve got time on your side. With that said, it is important to keep the timeframe of your retirement date in mind, because although you might have a high-risk tolerance, you may have a short time period until retirement. If that’s the case, you may not be able to ride the ups and downs of the market, and still meet your savings goal.
