Know Your Investment Risk Tolerance
In life in general there is always a question that can be asked, “Are the potential rewards worth the risks that come with this particular decision?” That very same question needs to be asked when investing your hard earned money. There is no uniform right or wrong answer to questions such as these, since it really does depend on your individual situation. Every person has a different risk tolerance level, and the sooner you find out what yours is; the more positive your investing experience will be.
The Single Most Common Mistake
Being unaware of your investment risk tolerance is arguably the single most common mistake that an amateur investor tends to make on a consistent basis. Frequently, individuals will hear about how much money was made in a particular sector or industry and decide they should dive in and try to be the next one who makes a fortune. Unfortunately, this usually does not end out well for these people.
Take a Risk Tolerance Quiz
There are a whole lot of great investment risk tolerance quizzes available to you on the web. Also, if you work with a brokerage you can speak with your advisor about risk tolerance and understanding exactly your suitable level may be. These quizzes often ask questions that put you in certain real-life situations and give you certain options of what you would most likely do. While these are far from foolproof, risk tolerance quizzes are a great asset to use to find out how conservative or aggressive you should be.
Risk Tolerance Should Adjust Based on Current Situation
A common misnomer about risk tolerance is that once you decide what yours is, you won’t need to change it any time. That could not be further from the truth. In fact, it is absolutely essential that your risk tolerance levels adjust as occurrences in your life change over time. One of the biggest strengths of an investment risk tolerance level is its ability to help you combine the goals that you want to achieve financially with your comfort levels to create a happy medium. Be flexible at all times with your investing!
Avoid Selling on the Low or Buying on the High
My favorite stock investing quote is from Warren Buffett, who says, “Be greedy when others are fearful and fearful when others are greedy.” It seems like a simple quote, but it really is much deeper than it appears on the surface. The truth is, many investors are burned by selling out when the stock market is at its lows or deciding to go dive in when the market is at its highest point. The most frequent cause of investors bailing out of the stock market too quickly is their risk aversion. In the end many investors cannot stomach the swings of the stock market and they end up cashing out when prices are at severely depressed levels.
Know Before You Invest
It is important to understand that before you ever start investing is when a risk tolerance profile should be created. Before you take the leap of faith you need to know what kind of assets fit you the best. Plan ahead and get a portfolio that is both profitable and comfortable for your risk appetite!