Investment Risk and You
Investment risk is the level of loss your portfolio is exposed too, both as a whole and as individual trades. Low risk investments have less chance for loss and provide steady returns, but those returns are lower. High-risk investments attempt to provide a high rate of return, but subject your portfolio and your trades to high levels volatility and greater chance for loss. With every level of risk, there is a corresponding level of return.
In actuality, all investment vehicles have varying levels of risk. Factors for each investment, even each trade, change over time and even with the seasons. You alone must decide the proper risk level for your investments.
Individual personal risk tolerance needs to be identified. If you seek professional advice, ask for references and be sure that your adviser goes beyond simple questionnaires in ascertaining proper risk. He needs to understand and know you personal needs. Determining your risk tolerance is just one of several important factors which need to be examined and balanced.
First you must identify how much money you will need to live on and also put aside non-risk savings. What is left after those decisions should be your risk capital for investing. Determine your investing goals and your time horizon for reaching those goals. These will be important factors in determining your risk tolerance.
Ask yourself questions. Is college for the kids close? Do you need a new home? Are major dental or medical expenses anticipated? All of these are important criteria.
If you are young, twenties or thirties, your risk tolerance can be higher, with a large percentage of trades and investments chosen in a high-risk category. When you experience down periods, your time horizon to make up that difference is long.
Moderate investments should be taken if your goals are more near term. If college for the kids is just 5 years off, you do not want to be risking capital on high risk returns when you may not have the recovery time needed.
People in their forties or fifties that are investing for retirement income have even different considerations. If you do not have significant savings, you are going to have to balance high and moderate risk investments to reach your goals. Your time horizon is short. You must manage and control your investments very closely.
If you do have some savings, divide capital into risk pools, cash, risk free savings, and risk capital. Keep adequate levels of cash on hand. Put capital you do not need or want to risk in safe returns. Use other capital in higher and moderate risk levels to achieve your goals. Balance your pools with time horizons and goal projections.
How a person perceives risk can also be important. You want to live to retirement and not be up night after night worrying about your investments! Balance your personal emotional needs with that of your portfolio and you will be a much happier trader and investor.
Your risk tolerance must be based on financial goals, plus how you feel about the possibility of losing money. Be smart with your decision. Become comfortable with your investments and trades. If you are uneasy, bad decisions may result in unnecessary loses. When in doubt, seek professional guidance, but you yourself must make the final decision.
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