Let’s face facts; there’s no such thing as a sure investment that’s guaranteed to deliver a return on your capital.
While not all investments are speculative, they all incur the risk of loss. In the case of forex traders, for example, it’s estimated that as many as 70% of individuals actively loss money over time.
Of course, the extent to which you’re willing to lose money in the pursuit of returns is governed by your tolerance for risk. But what exactly does this mean, and how can you evaluate this as an investor.
What is Risk Tolerance and its Various Types?
In simple terms, your risk tolerance refers to your willingness or ability to tolerate a depreciating in your various asset classes while remaining invested.
More specifically, it describes your willingness to ride out losses and temporary market volatility in the pursuit of gains. Typically, there’s a strong correlation between risk and reward in the investment market, which is why those of you with a voracious appetite for risk more able to commit to higher yield assets.
The key is to evaluate your risk tolerance and its various categorisations before structuring your investments, and this will enable you to make informed selections and create a portfolio that can be adhered to over time.
Aggressive risk tolerance describes a willingness to seek out high risk, high return assets, including highly leveraged options such as forex. Then there’s conservative risk tolerance which is largely risk averse and committed to achieving incremental and reliable gains, while moderate risk tolerance treads the ground between these two extremes.
Understanding Your Investment Goals
In order to appraise and establish a viable risk tolerance, you’ll first need to clarify your wider investment goals.
The reason for this is simple; as different aims or objectives will require variable tolerances to risk, depending on the amount of initial capital required and your expectations with regards to returns.
Creating clear and concise targets in this respect should always be a prerequisite to managing risk tolerance, before evaluating individual investments and their risk-reward profile to ensure whether they fit into your portfolio.
You may want to consult with financial experts at this stage, in order to effectively build and balance your investment portfolio in line with your goals.
Another key consideration when understanding risk tolerance and building investments is timeframes. This refers to the timeframe in which you expect to recoup a return, whether you need money to accomplish a particular goal or want to achieve a payout that supersedes your initial deposit or margin.
The issue here is that investments with shorter timeframes tend to be more volatile overall, whereas longer-term positions can usually ride out peaks and troughs in the market naturally.
Make no mistake; timeframes should be considered alongside your clear investment objectives and broader understanding of risk, as this type of seemingly small detail can have a huge impact on the success of your portfolio.