Determining Your Risk Tolerance for InvestmentsSubmitted by Pennington Financial Group on July 24th, 2017
Most major life decisions require a certain degree of risk. Similar to buying a home or opening a business, investing involves risk and the outcomes are uncertain. Even with investments that you may view as safe, there is still some degree of risk associated with the investment process. Therefore, it is important to be aware of the risks when investing and to know your limits regarding how much risk you are able to tolerate. In order to test your limits and see how comfortable you are with various kinds of investments, you should determine your risk tolerance for investments.
Risk tolerance is the degree or extent of return variability that an investor is willing to accept for any particular investment—a very broad and general definition. As an investor, the most crucial aspect of risk tolerance is to determine that you have a realistic grasp on your financial comfort level. Some factors may sway your individual risk tolerance, such as your time period for investment and the effect of unforeseen events – for example, changes with career, income, and other areas such as Social Security, homeownership, and inheritance. These factors are important because they help determine your comfort level with respect to the degree of risk that you are able to bear.
Most people classify their risk tolerance into one of three categories: aggressive, moderate, and conservative. Aggressive investors have a high risk tolerance and usually attempt to achieve high returns by assuming commensurate risk. The outcomes with aggressive investments may result in large gains or large losses. If you are an aggressive investor, you should have a more thorough knowledge of the market trends so that you may make wise investment choices. Moderate investors possess a moderate level of risk tolerance because they have a balanced approach to investing – attempt to increase the likelihood of capital preservation usually resulting in lower returns. Conservative investors, those with a low risk tolerance, are not willing to accept much volatility in their investment portfolio because they have a capital preservation approach to investing. Conservative investors often gravitate towards investments with low volatility which usually generates low returns, such as CD deposits.
If you are considering an investment and interested in determining your risk tolerance, it is prudent to meet with a financial advisor for more personalized advice and guidance. At Pennington Financial Group, we can help you discover your risk tolerance to increase the likelihood of your making strategic and wise investments. We are located in Gold River, California and serve the surrounding area.