Risk Tolerance: What Influences Your Investing Decisions
When it comes to investing, it’s important to have a clear understanding of your risk tolerance. This is the degree of uncertainty or potential loss you are willing to accept in pursuit of higher potential returns. We spoke with two investment experts to get their insights on what risk tolerance depends on and how to determine your risk tolerance.
According to investment advisor Brad Nolan, “Risk tolerance depends on a variety of factors, including your investment goals, your financial situation, and your personal preferences.”
Nolan notes that investors who are focused on long-term goals, such as retirement, may have a higher risk tolerance. “Investors who are focused on long-term goals may be willing to take on more risk in pursuit of higher potential returns,” he explains. “This is because they have more time to weather market downturns and allow their investments to recover.”
On the other hand, more risk-averse investors may have a lower risk tolerance. “Investors who are more risk-averse may be willing to accept lower potential returns in exchange for greater stability and security,” he adds.
Another expert in the industry is financial planner Natalie Harris, who notes that risk tolerance can also be influenced by external factors, such as economic conditions and market volatility. “Investors may feel more or less comfortable taking on risk depending on the state of the economy and the performance of the stock market,” she explains.
Harris notes that it’s important for investors to understand their risk tolerance before making investment decisions. “Investors who are not comfortable with the level of risk they are taking on may be more likely to panic during market downturns and make impulsive decisions that can harm their portfolio,” she says. To determine your risk tolerance, Nolan and Harris offer a few tips.
Consider your investment goals: Your investment goals can play a key role in determining your risk tolerance. Investors with long-term goals may be willing to take on more risk in pursuit of higher potential returns, while those with short-term goals may have a lower risk tolerance.
Assess your financial situation: Your financial situation can also influence your risk tolerance. Investors with a stable income and a strong financial cushion may be more comfortable taking on more risk than those who are more financially vulnerable.
Evaluate your personal preferences: Your personal preferences can also play a role in determining your risk tolerance. Some investors may be more risk-averse by nature, while others may be more willing to take on risk in pursuit of higher returns.
Seek guidance from a professional: If you are unsure about your risk tolerance or how to invest your money, it may be helpful to seek guidance from a professional financial advisor who can help you evaluate your options and make informed decisions.
In addition to understanding your risk tolerance, it’s also important to remember that risk and return are closely linked. Generally, investments that carry a higher level of risk also offer the potential for higher returns. However, this is not always the case, and investors should always conduct their due diligence and carefully evaluate their investment options before making any decisions.
Understanding your risk tolerance is a key part of successful investing. Risk tolerance depends on a variety of factors, including your investment goals, financial situation, and personal preferences, as well as external factors like economic conditions and market volatility. By carefully evaluating your options and seeking guidance from a professional, you can make informed investment decisions that align with your risk tolerance and help you achieve your long-term financial goals.