Risk tolerance is a characteristic that describes the investor and his ability to withstand losses from investments. The higher risk tolerance of investor the more losses he/she may handle.
Investment is a risky despite the chosen investment strategy, nevertheless different class of investment carries different risk level. If investor’s risk tolerance is low then he/she should not invest in stocks or other risky investments but instead chose some fixed income securities.
Risk tolerance of investor is a personal characteristic and depends on the person’s character, experience, age, financial situation, and investment aims. All those criteria are very important for risk tolerance and have to be considered when risk tolerance is chosen.
The problem is that everybody is afraid of risk but also everybody wants to earn more, and riskier investments are promising higher returns. The perfect balance of risk tolerance and investment return is difficult task and cannot be achieved by those who are only beginners at investing. Equally this task is crucial for investor because it takes not much of a time but consequences of wrong decision can be dramatic. That’s why advise of experience investor should be very valuable.
However, if risk tolerance is chosen by the investment consultant for the client, he should closely know the client (investor) to do a good job. Usually for the clients some tests are given which may lead mistakenly and make investor regret for it in the future. If investor is inexperienced and starts investing large amounts it would be advisable to start from low risk tolerance until investor will face real stock market crash and will experience what the real losses of money are. Only then investor will see how he/she is really risk averse.
Read more how to chose risk tolerance level.
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