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Risk Tolerance

Risk tolerance is an investor’s ability to handle declines in one’s investments. It’s your comfort zone in withstanding market swings. Investment firms use risk tolerance as a method to differentiate investors and to direct individuals into appropriate securities. A common breakdown of investor types is outlined below:  

·        Conservative – Concerned with capital preservation and not comfortable with volatile securities. Financial assets may be exposed to inflation risk

·        Moderately Conservative – Cautious. Takes prudent and calculated risks. Has a balanced portfolio weighted towards fixed income.

·        Moderate – Focused on a balanced portfolio, weighted towards equity. Some diversification in emerging markets or Mid Cap companies.

·        Aggressive – Willing to take significant risk and have time to recoup losses.

Over the years some interesting, risk-based, expressions have developed. While popular, these sayings may or may not be valid.

·        The greater the risk, the greater the reward.

·        The younger you are, the more risk you should take.

·        The shorter your time horizon the more liquid and secure your investments should be.

·        Money makes money. The greater your assets the more risk you can afford.

Investors need to be careful with risk tolerance strategies. Investing is not gambling. It’s taking calculated positions, looking for a return of principal plus a profit. Adhering to the main rule of investing, “don’t lose any money” will automatically narrow investment choices, and reduce overall risk. Risk should only be incurred if there’s a clear and probable path to profit.

 

 

 

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