Investment Risk Tolerance Level
When deciding on the investment in a particular stock you should weigh whether the risk is worth the reward you will gain. In order to make investment choices that fit your financial goals you should first establish your risk tolerance and conform the investment decisions you make to it.
Risk includes the possibility of losing money. However, extra considerations should be made in addition to the safety of the principal and the potential for growth. These considerations include the likelihood of achieving the financial goals you have established. Additionally, you should consider whether you are willing and able to accept a higher level of risk in order to achieve further rewards.
Investing risk is commonly linked to the possibility of losing your hard-earned money. There are many investments with extremely low levels of risk. Such low risk investments include US Treasury bonds and bills. They are risk free because they are guaranteed by the US government. Other investment that is almost risk-free is certificates of deposit (CDs), which are issued by banks and are federally insured.
The price you pay for low risk is the profit you gain. Under such investments your returns are extremely low. In real growth terms you may be further disappointed since the effects of inflation and taxes eat up your profits.
The lower the level of risk the lower the returns. We will continue to repeat that so that to help you determine how risk averse you are. The achievement of financial goals is determined mainly by the amount you have allocated for investing and the time you have. Additionally, the rate of return and growth play a major role in the achievement of your financial goals.
If you are a more conservative type of an investor, you should increase the amount of money for investing. You should also start early so that you have more time to accumulate money. Don't underestimate the role of inflation though. When estimating the time needed for your goals achievement, include the taxes you are liable to as well as investment fees.
Risk Tolerance Level
Before starting on the setting of the investment portfolio, every investor should establish his/her risk tolerance level. Only after this s/he is ready to build strategies for the accomplishment of his/her financial goals.
The higher the degree of risk involved in the investment portfolio the greater the chances of higher returns and failures.
You should develop you risk tolerance level in such a way that you are comfortable with it without having any worries concerning the investments you have chosen.
The setting of the risk tolerance level is very subjective issue. However, younger investors can afford more risk taking since they have more time to fix the losses. On the other hand older investors should apply more conservative approach since they have less time in front of them. But, they should keep in mind that they greatly decrease their chances of faster achieving their financial goals.
A portfolio that carries more bonds is considered more conservative and risk averse. However, the one that includes a greater percentage of stocks is more risk taking with higher potential of rewards. Many financial experts recommend the diversification between investments with different degrees of risk. This is a good idea since your portfolio will benefit from the rises and falls of the different investments and will alleviate the potential of losing money.
The important thing to remember is that you cannot go without risk if you are to start stock investing. What you should do is to determine your risk tolerance level and try to minimize the risks you can control.
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