What would you do if your investments lost 20% in value overnight? How would that make you feel about investing? Some people would panic, others may find it as an opportunity to acquire more assets at a discount, and others would never put themselves in that situation in the first place.
Determining and understanding your risk tolerance for investments is a fundamental part to planning your investment strategy. Without knowing the level of financial risk you are willing and able to sustain, it would be difficult to identify your investment strategy and build an appropriate portfolio.
Your risk tolerance should determine a suitable asset allocation that is right for you. For instance, if you worry about finances, are primarily concerned with keeping your money safe and cannot fathom the possibility of losing money, a conservative portfolio consisting of mostly fixed-income investments, such as high-grade bonds and CDs, would be the right for you. On the other hand, if you are a thrill seeker and willing to take on big risks with your money in exchange for potential high gains, an aggressive portfolio may be well suited for you.
While the amount of risk you are willing to take has to do with your personality and emotional ability to tolerate risk, your overall investment goals and age also has a lot to do with determining your tolerance level. When you are young, you have the ability to hold on to your investments and weather out poor market conditions. As you get older and approach retirement, preservation of capital should be the greater focus.
So are you a conservative or aggressive investor, or somewhere in between? How much risk are you willing to take in exchange for reward? To help determine which mix of investments may be best for you, use these asset allocation and risk tolerance calculators:
Millionaire Money Habit: Use the calculators above to determine your risk tolerance, check your results against your current investment portfolio, and re-balance if necessary. Keep your risk tolerance in mind as you consider your investment strategy, and be sure to adjust this strategy as your tolerance decreases over time.
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