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
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
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
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
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.