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How to Choose Risk Tolerance at Investing?

 

Why to Invest?

Investing and Personal Finance 

Investment Goals and Factors 

How to Choose Risk Tolerance at Investing?

Types of Investments

Asset Allocation

How to Pick Securities

Risk and Reward

The Main Steps for Investing Beginners

 

 

The risk tolerance is extremely important personal characteristic at investment. The whole investment strategy should depend on it. Sometimes it is hard to see clearly, what comes first: whether the risk tolerance or asset allocation. While theoretically risk tolerance should be the background for asset allocation, in practice risk tolerance changes together with appetite for the profits. 

 

However, if you want to achieve good results from investing over long period, the risk tolerance should not change significantly, especially to get higher. The situation in financial market changes continually, but those changes should not affect yours risk tolerance at all. We should compare your risk tolerance to fear of flight. You don’t fear it when you sitting safely on the couch at home, but it strikes you down when you are inside the plain. The same with risk tolerance, you are not afraid to lose money when markets are rising, but you suffer greatly when the real stock market crash will come. And you can be sure it will happen sooner or later.

 

So how can you know what is you risk tolerance? It is a hard question. Especially is hard to determine yours risk tolerance if you haven’t yet suffered any real stock market decrease. 

 

The risk tolerance should show to you what part of assets you are ready to loose in worst case scenario. And most of the people had experienced some big losses in life and they know how sensitive they are about it. It is all about risk taking or avoiding the risk. If a person is a risk taker in all spheres of life, then he should have higher risk tolerance at investment too. If a person is very careful in any kind of decisions, then he should have low risk tolerance for investment too. 

 

Simple as that. But the true is than any investment consultant cannot know about person’s risk tolerance for investment losses until he knows that person very closely. 

 

If you will chose the risk tolerance too aggressive, then very probable that when hard times will come you will make some stupid decisions that may ruin your life. That’s not good. But if you will choose the risk tolerance too low, then you will condemn yourself for low-yield investment portfolio which will burn a lot of potential return from investments.

 



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