Choose Investments Based on Risk Tolerance

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Choose Investments Based on Risk Tolerance

The degree to which you are willing to take losses in your portfolio to receive high returns is known as your risk tolerance. All investors are risk-averse in that they do not want to take unnecessary risk or risk for which they are not rewarded.

First, find your risk tolerance

Before you decide on an investment, you will need to come to terms with your risk tolerance. You will then want to choose investments that give you the highest possible returns for your acceptable level of risk. But how do you know how much risk you are willing to endure? Unfortunately, there is no simple answer. Your risk tolerance depends on your investment goals and the way in which you approach investment decisions. Start by asking yourself a few basic questions:

• Do you want your investments to provide you with income you can use today, or do you want them to grow substantially over time to be used later?
• Are you willing to accept an occasional loss if in the long run your returns will be higher than if you did not take risk?
• What is the maximum portfolio loss you are willing to accept each year?

Risk tolerance can change

Ultimately, your risk tolerance may be different every time you make an investment. Your recent successes or failures can influence your next decision. But when you do it, it is important to be honest with yourself about your risk tolerance. You don’t want to be kicking yourself later.