Before investing, you should determine your risk level. Complete this risk tolerance assessment here:
and answer the following questions:
- How do you define risk tolerance?
- What do the results of the assessment indicate about your level of risk tolerance? What was your recommended asset allocation (i.e., X% stocks, Y% bonds, Z% cash)?
- What, if anything, would change your risk tolerance?
Two major components of your risk tolerance are your age and family situation. For example, if you are at the beginning of your working career, your tolerance for investment risk can be quite high because you have a couple of decades to to recoup investment losses. As your life evolves, your risk tolerance will also evolve, and you will, at the middle and end of your working life, tolerate less risk simply because you have fewer years in which to make up an overly-aggressive investment strategy.
Most people, as they come closer to retirement, tend to move their investment portfolios into stable investments--moving from a large stock portfolio, for example, to a portfolio made up of less volatile investments such as mutual funds, exchange traded funds, and fixed-income investments (certificates of deposit). Of course, it is a good idea to begin your investment life with a diversified investment portfolio--some volatile/some stable--investments and expect, to the extent you are in stocks, to stay in the market over many years so that the highs and lows balance themselves.
Your family situation is also a significant element of risk tolerance. When you are single or otherwise unencumbered, your risk tolerance can be quite high. If you get married and have children, risk tolerance usually goes down because you have other futures in your hands rather than just your own.
Many of the questions that are posed here are going to be completely dependent on circumstances and context. Individuals who experience different financial realities will feature different answers to the questions posed. At the same time, I think that you need to examine your own predispositions towards risk and financial tolerance of such a condition in order to generate an answer that authentically reflects your own beliefs. You can take what is offered here is a guideline to the most important element of risk tolerance: Your own voice.
In defining "risk tolerance" one sees the importance of individual voice in the process of investment. Risk tolerance can be seen as how much one can absorb in the volatile world of financial investment. It is "the degree of variability in investment returns that an individual is willing to withstand." The results of my experience with the assessment reflects what I pretty much knew about myself. The investor profile offered about me was "You probably would prefer investments that tend to provide fairly stable returns. But you also realize that for the possibility of higher returns, you'll have to be willing to accept some additional risk." It was assessed that about 55% of my portfolio should be in stock investment because while stocks "may be volatile in the short-term" they "offer the best opportunity for long-term growth." With bonds at 25% and cash at 15%, my investor assessment pegged me as a "middle-of-the-road investors who seek to balance moderate growth potential with lower-volatility investments." Such an assessment speaks to how my risk tolerance is low and I am not one who "withstands" a great deal in terms of financial investment. The fact that I would even consider typing in "speculation" reflects my fiscally conservative nature. For an investment banker, I am not a very good catch because of my low risk tolerance.
I would say that one aspect that could change my risk tolerance would simply be more money. If I had a greater reservoir of wealth, I, like many others, might be more open to the idea of investing in high risk, high rewards endeavors. I don't, so I won't. Another factor that could change one's risk tolerance would be consistent and steady return on investments. I tend to think that if investments are made and there is steady and fruitful return, without taint of fraud or misallocation of funds, those who are fiscally conservative could be convinced to change their risk tolerance. Finally, I think that consumer confidence plays a large role in changing risk tolerance. When investors feel good about their national economy and their own personal economic status, their risk tolerance grows. Conversely, if it turns out that confidence is low, the tolerance decreases because people focus more on the losses than any potential for successes. It is in this regard where I think that risk tolerance is not fixed or static. Like economic conditions, themselves, risk tolerance is malleable and can change.