Risk tolerance comes down to how much risk you are willing and able to stomach. It is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.
If you are losing sleep, worrying about your investments, fearing that a market correction may bring your portfolio down too much, then you are likely carrying too much risk. On the flip side, if you’re worried that you could be missing out on earning potential, your investments might be too conservative.
Knowing your risk tolerance goes far beyond being able to sleep at night or stressing over your trades. It is a complex process of analyzing your personal financial situation and balancing it against your goals and objectives. Ultimately, knowing your risk tolerance – and keeping to investments that fit within it – should keep you from complete financial ruin.
The best way to help you gain a more quantifiable measure of your risk tolerance is to talk to a trained qualified experienced professional. Trying to figure it out with simple quizzes found on the internet could lead to less desirable outcomes. Many factors need to be considered. Things like age, personal experience, net worth, comfort level and time horizon are just a few of the many factors one needs to consider.
