Whether you run your own assets or work with a financial manager, maybe you’ve heard about investment risk tolerance. What does this mean?, risk tolerance is “The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.” (Risk tolerance, 2010).
In other words, risk tolerance is a measure of how much you are willing to sacrifice when the economy goes down. Most Americans are aware of what their real risk tolerance when financial crisis broke out — not the ideal way to find out.
The only sensible way to learn your risk tolerance is to answer a questionnaire. You can find one online or at a financial professional’s office. There is no universal questionnaire, but they all have almost similar questions, example:
- When will you need the money from this particular account?
- What is your investment objective?
- What is your net worth?
You don’t need to think much, these are multiple choice questions and there usually aren’t that plenty. You will be categorized according to the result of your answers.
There are 3 levels of risk tolerance: conservative, moderate and aggressive.
Regardless, the most common used charts are moderately conservative and moderately aggressive risk tolerance as well. It is a must to learn your risk tolerance because it is the very basis of putting up a personal investment portfolio. Differences in risk tolerance lead to different combinations of fixed and equity investments as well as growth and value investments within a given portfolio.
Conservative investors have the lowest risk tolerance; because they prefer not to dispose any money or to lose even just small amounts. Apparently they are also open to settle for a lower earnings. They should stick to investments with guaranteed rates of return such as money market accounts, CDs and bonds with limited hazards to stocks. The usual combination of fixed and equity investments in a conservative portfolio is 80/20.
Moderate investors can stand some risk; they either have plenty of time before they need the money or they just have plenty of resources to compensate for the losses. Usually moderate portfolios need around 50/50 combination of stocks and bonds.
Aggressive investors can handle the most risk in hopes of getting the highest profits. They often have high net worth and can invest in huge things as real estate investment trusts, unit investment trusts, limited partnerships and other investment vehicles not available to regular American. One of the more common fixed-equity investment combination in an aggressive portfolio is 20/80.Which means that they make money fast compared to other types of investors.
There are even some who goes for 100% in the market.Before investing, be sure to know your risk tolerance and come up with right investment allocation for your portfolio. If you are on the conservative side, a wrong appropriation will have you uneasy and worried about losses. However, if you are a moderately aggressive or an aggressive investor, an overly conservative portfolio will make you unsatisfied with the earnings.
When I was just new online, I remember the very first browser I’ve ever used was Internet Explorer. Back then, IE was the sole browser that I’m aware of. In fact, I was such a newbie that only the simple things like doing research, visiting sites, chatting on YM and sending emails are the only things I knew of whenever I go online.
