14. Risk tolerance: do you know yours?
The level of risk we assume in our investments is a key factor in decision-making. Risk tolerance varies from one investor to another and depends on factors like age, financial goals, financial situation, investment experience, and personal risk aversion. Do you know yours? In this post, we explain how to assess it and how it impacts your investments.
What is risk tolerance?
Let’s start at the beginning. Risk tolerance is the ability to withstand uncertainty and potential losses associated with an investment. In other words, it’s the amount of risk investors are willing to take on before they become uncomfortable or concerned about fluctuations in their investments.
Some investors may have a high risk tolerance and be willing to invest in more volatile assets in pursuit of higher returns, while others may have a low risk tolerance and prefer safer investments, even if it means lower returns.
Steps to determine each investor’s level
To determine your risk tolerance, it’s important to evaluate some key aspects of your current situation. Here are some steps to help assess yourself:
- Evaluate your financial goals: Define your financial objectives. Are you saving for retirement, your children’s education, or a home purchase? The clearer your short and long-term goals are, the better you can assess your risk tolerance.
- Consider your investment horizon: How long do you plan to hold your investments? If you have a long-term investment horizon, you may be able to tolerate more risk. For short-term goals, a more conservative strategy may be desirable.
- Assess your financial capacity: Analyze your current financial situation. Can you afford to incur losses in your investments? Having an emergency fund and a solid budget are important factors.
- Reflect on your emotional tolerance: Consider how you feel about market volatility and financial losses. Some people can sleep soundly with risky investments, while others may easily become stressed.
What is my risk tolerance?
Once you’ve evaluated these factors, you can determine your risk tolerance. The three most well-known categories are:
- Conservative: You prefer low-risk investments and are willing to accept lower returns for greater security.
- Moderate: You are willing to take on a moderate level of risk and diversify your portfolio with various investments.
- Aggressive: You are willing to take on significant risk in pursuit of higher returns.
Risk tolerance can change over time, especially if there are changes in your personal or financial circumstances. Therefore, it’s essential to regularly review your risk tolerance and adjust your investment portfolio accordingly.
In conclusion, the level of risk we assume in our investments is an essential part of financial planning. By understanding and applying it effectively, we can make investment decisions that align with our goals and help us achieve long-term financial success. At Urbanitae, we offer various project types that cater to all types of investors based on the level of risk they are willing to take on.