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The world of investing is very subjective--the investment plan that’s right for you depends largely upon the level of comfort that you have when it comes to risk. You can’t completely avoid risk when it comes to investing, but it is possible for you to manage it.

There are two aspects of risk tolerance to consider: (1) the capacity of your investment plan itself to absorb losses, and (2) how comfortable you are personally with risk. The first aspect can be quantified--the more flexibility your investment plan has when it comes to potential loss, the more risk your plan can tolerate. For example, as we’ve discussed, a long investment time horizon may allow you to take on more risk than a short time horizon.

 

"You can’t completely avoid risk when it comes to investing, but it is possible for you to manage it.." man on rope

 


The second aspect, how comfortable you are personally with risk, is more of an emotional measure, and depends on many factors, including your objectives, life stage, personality, and investment experience. Some investors are comfortable with a high degree of risk, while others can tolerate only minimal risk. Your individual risk tolerance is an important factor in deciding which individual investments are appropriate for you, as well as how your investment dollars should be allocated among different investment classes.
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Investors are typically grouped into three categories for purposes of discussing risk tolerance: aggressive (those who have a high degree of risk tolerance); moderate (those willing to accept some degree of risk), and conservative (those who are risk averse).

 

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