Mar

31

Investing If Your Risk Tolerance Is Low

Posted In: Investing Tips

The most important thing to know about investing in the stock market is that is involves some risk. In fact, there is no such thing as an investment with no risk. And don’t think that you can avoid risk by not investing either. Because even if you hide your money in a shoebox under the bed, you are still taking a risk that it may be stolen or that its value will decrease over time due to inflation. So the best you can do is learn how to minimize risk, and make good decisions based on your risk tolerance. Here are some tips to help you identify your risk tolerance so you can make smart investment decisions.

First, identify your investment goals. Are you investing $100 dollars of each paycheck so that you will have money for retirement in 10 years or 30 years? Or are you investing a $5,000 gift that the grandparents contributed to help pay for college for your kids in 15 years? Or are you investing every spare cent that you have for the next 3 years in order to be able to buy a house? Each of these goals involves a different beginning and ending amount, and a different time frame.

Generally, the longer the time frame, the more risk the investment portfolio can absorb, because theoretically there is time to recover from the ups and downs of market cycles. That means your age and the length of time until your retirement might be a factor when you determine the types of stocks to include in your portfolio (for example, growth stocks versus income stocks).

But the time that you have available to recover from losses is not necessarily an indicator of your own personal risk tolerance. Other important factors come into play, like your ability to tolerate stress, how much you worry about finances, how much savings you need in the bank to feel comfortable. And if you have a spouse and children, you need to factor in how your decisions would affect them.

Experts advise people to have 6 months worth of liquid assets on hand to weather cash flow emergencies like job loss or illness. So when you are determining your risk tolerance for investing, the most conservative approach is to figure out your security needs first, and make sure that you have those funds in safe and insured assets. After that, let your time frame inform your decision of whether or not you can afford investments with a little more risk.

Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://www.Invesmint.com.

Article Source: Investing If Your Risk Tolerance Is Low