When it comes to investments, risk tolerance is an issue often discussed but rarely defined with precision. And maybe, because it is a complex issue that has to do with the psychology of each investor, is a difficult topic to address, because there are no fixed rules can be applied equally to everyone.
As a first tool to approach this issue, there are tests that candidates can apply to measure. Surely, as a result investors may be described as: conservative, intermediate or aggressive. But beyond these basic tools “general” measure, how really establish the level of risk you are willing to tolerate?
Then we will try to sketch an answer to this question, from an unquestioned assumption: risk, along with expected performance, up two intrinsically related variables that we can not overlook, when addressing our investments.
The words “Know thyself” appeared in the doorway of the temple of Apollo at Delphi, a place of worship to learn in ancient Greece. The have heard many times and I think are very appropriate in the investment world: the idea is to stop thinking about various aspects of our person, in order to define the level of profitability that we can access a realistic in a changing market and full of possibilities as today.
In principle, in the process of meeting and see how far you’re willing to go, leave aside the issues that seem most obvious. In an article I read recently, the author advised not to fall into a cliché that happens too often: to directly link the level of risk tolerance with age of the investor.
According to popular wisdom, a young investor has in mind a longer time horizon of investment needs and can accept more risk. Following this logic, an older individual has a more limited investment landscape. While this may be descriptive in general terms, in practice there are other factors that come into play, as simple as the amount of capital available to the investor.
Also, always be cautious about blindly following conventional wisdom. That is, the fact that a person is 65 years does not mean you should bend only conservative investments. While this may be adequate for many, it probably is not for everyone. And with life expectancy increasing high and progress of medical science, a person 65 years ahead may be 20 years or more on your investment horizon.
Moreover, the investment objectives must also be considered and have to do with the expectations of each. If you’re saving money for their children’s education or for retirement, how much risk you really run? Conversely, they may face increased risk if one uses additional revenue to try to make extra money. But in any case, regardless of the age of the investor and the time of life that is important to assess the financial situation clearly, what are the expenses that can not be circumvented, which may limit our investments.
When one intends to measure your risk tolerance, the level of investment experience should also be considered. One wonders: I’m new to the field of investment? “I’ve been doing this for so long, but I’m trying to break into a new sector? When undertaking new challenges of any kind, it is always important to have some degree of caution. And in the case of investments is the same.
Know your investment
In addition to age and time horizon of each investment objectives and level of experience, it is necessary to evaluate each particular operation and measure the risk inherent in investments and products that interest us. In addition to investments in cash, one may opt for fixed income products (such as bonds) or equity securities (like stocks). But the key is to understand the risk of each product and that can help make clear where the investor wants to be. There is risk in any investment product, so it is important that you analyze and see what might be the consequences and think very carefully before embarking on the road for a good investment.
There are many things to consider when determining our risk tolerance. The answer is based on age, experience, personal financial situation and specific investment you want to accomplish. After reflecting on these issues, an investor may be ready to begin a program of balanced and diversified investment.
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