Risk Tolerance: What Is It and How Do You Determine Yours?
3 min read
If you're nervous about investing in a stock, option, or another security, you're not alone. It can be scary to lock up your cash for any period of time, because it means less money liquid. Even blue-chip stocks—aka stocks that have been on the market for a long time—carry some risk. That's why you ought to know your risk tolerance before investing.
What is a risk tolerance, and how can you determine yours as you dip into the US stock market?
Risk tolerance: The rundown
In the investing world, a risk tolerance is an investor's personal willingness to withstand volatility.
All securities carry risk. However, some stocks, funds, and securities are more volatile than others. A person with a low risk tolerance may be more conservative in their investments (like tried-and-true index funds), while someone with a high risk tolerance may take bigger risks (like investing in startups or cryptocurrency).
Things like time horizon, age, goals, size of your portfolio, and your own comfort level impact your risk tolerance.
Key types of risk tolerances
Much like a fingerprint, everyone has a unique risk tolerance. To identify your own risk tolerance, it helps to think about the key types among investors in the US stock market, the Dubai market, and everywhere in between.
High risk: This is an aggressive risk tolerance suited for people who are educated and understand the markets. Greater risk brings more volatility, but well-curated portfolios can often withstand it.
Moderate risk: This person is somewhere in the middle. They usually set limits for how much loss they're willing to accept before selling.
Low risk: This person is not a risky investor. Returns may be lower, but so are the chances of losing equity.
Get a more accurate risk tolerance by learning more about investing
As with any subject, the more you learn about investing, the more control you have over it. Keep reading blogs and books, listening to podcasts and radio shows, and generally surrounding yourself with investing information. Through this, you'll be better able to assess your own risk tolerance for investing.
Don't feel pressured to invest like people on the internet
You don't have to invest like the folks on WallStreetBets or say "YOLO" about $10,000 USD. As Socrates puts it, understand what you don't understand. Commit to learning more over time. That's true wisdom.
Your risk tolerance will change over time and with different goals
You may take bigger risks with your retirement fund since you don't need that cash for decades. Meanwhile, you may be more conservative with money you're hoping to access in five years.
Your ability to handle risk will also shift over time. There's even research that says it changes throughout the week. Your "willingness to take risks decreases from Monday to Thursday and rebounds on Friday," according to Dr. Rob Jenkins.
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