Every individual has his own threshold levels beyond which he can not take any more risks. Any responsible and reputed stock broker or finance planner will help you in realizing this threshold level unless he has already been able to assess it with his professional expertise. After gauging your level of risk tolerance, they should work in conjunction with you regarding all future investments, where you can stay within comfortable limits of your risk-bearing ability.
There are a few things you need to bear in mind before you can assess your independent risk-taking ability. For instance, things like how much money you can invest, what types of investments you want to get into and what your ultimate financial goals are.
For instance, imagine a situation where you have only ten years to retire and you do not have much money saved up. Here you have to be really cautious with your investments and do some very high-risk planning to reach your financial goals. This is because your steady source of income from your job may cease from the day you retire.
On the other hand, if age is on your side, and that is if you are in your early twenties, and wish to start in investing in stocks to make adequate money for retirement, your risk tolerance is low. This means you are at an age, when you are capable of taking high risks, as time is in your hands and can watch your investments grow with time.
Remember one crucial thing about your risk taking ability. Whether you have high or low risk tolerance, it has nothing to do with what your thoughts are on ‘risk’ as a concept. There are a lot of factors which are involved in determining a person’s risk tolerability.
Suppose you have invested in stocks and are watching the stock movements daily and very keenly and see the stock values drop slightly. What would be your immediate reaction?
If you have a very low risk tolerance you would jump and sell your stocks fearing it might drop further and you are going to lose all your money. If you were a high risk taker, you would wait and watch and let the money ride and takes its own time to grow again.
A good and trusted stock broker would take into account your risk tolerance levels and advise you accordingly – which stocks to invest in and which not to, depending on much you can tolerate the turbulence of the stock market.
Risk tolerance is determined by what your financial goals are: how much money you wish to make and within what time frame. Another factor is how you feel about losing money. Sometimes you might have to lose lots of money. These factors are all inter-related in determining a risk tolerance level of an individual.
