Assessing Your Risk Tolerance!

One of the first factors that needs to be considered when thinking about making any type of investment is risk.  When it comes to investing, you need to remember that risk and reward go hand in hand. The phrase “no pain, no gain” – comes close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: all investments involve some degree of risk. If you plan to buy securities – such as stocks, bonds or mutual funds or even if you loan money to a friend – it’s important that you understand that you could lose some or all of the money you invest.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you may make more money by carefully investing in higher risk assets, such as stocks or bonds, than if limit yourself to less risky assets. On the other hand, lower risk cash investments may be appropriate for short-term financial goals.

An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.

Many investment websites offer free online questionnaires to help you assess your risk tolerance. Some of the websites will even estimate asset allocations based on responses to the questionnaires. While the suggested asset allocations may be a useful starting point, keep in mind that the results may be biased towards financial products or services sold by companies or individuals sponsoring the websites.

With the above said, risk vs. reward is simply exercising common sense.  If you do your homework (due diligence), you should be able to make intelligent decisions.  If you don’t understand the investment or it sounds to good to be true, just say no.