Risk Tolerance in Investing
Every one of us has risk tolerance. It plays an important factor in determining our decision in buying or selling a share. Risk tolerance can be literally described as how we feel about the money we’re investing in, specifically, how we feel if we lose.
For a broker or financial planner, it is very important for him to determine the level of risk tolerance his client has, since this will influence what his client will do when a share value drops. By taking in account his client’s risk tolerance, the broker could advise the client on what types of investment a client should go into.
Clients with higher level of risk tolerance tend to go with the flow of the share even if it is decreasing in value, while clients with low risk tolerance tend to want to sell it at the first sign of share value dropping.
Risk tolerance is also a factor influencing our financial goals—how much we want to invest and for how long. If our financial goal is to earn a specific amount within a short span of time, we may need to increase our investment and also increase our risk tolerance to a more aggressive and more risky type so as to be able to reach our financial goal. On the other hand, if our financial goal is set at a minimum with a longer time period, then we can go for the lower, less risky types of investment.