{"id":7495,"date":"2014-03-14T12:33:06","date_gmt":"2014-03-14T19:33:06","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7495"},"modified":"2016-12-21T07:28:08","modified_gmt":"2016-12-21T15:28:08","slug":"understanding-investment-risk-tolerance","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/understanding-investment-risk-tolerance\/","title":{"rendered":"Understanding Your Investment Risk Tolerance"},"content":{"rendered":"

Most people, once they get safely past their teenage years, have a pretty concrete list of risks they don’t care to take.<\/p>\n

Skydiving, for instance, is either on your bucket list or not. After a certain age, you’re either itching to do it or itching to avoid it.<\/p>\n

While we tend to get better at assessing\u00a0risk\u00a0as we get older, we don’t seem to learn as much about\u00a0financial risk<\/a>. In the markets, we seem to be perpetual teenagers, always stepping in too deep for our own good.<\/p>\n

Unless the market moves against us once, hard. Then the opposite tends to happen. We get over-concerned about\u00a0risk\u00a0to the point that we stop investing completely.<\/p>\n

\"risk<\/a><\/p>\n

Understanding where you are on this curve is important. If you take too little\u00a0risk\u00a0as a young investor, you might leave a lot of money on the table. Failing to realize the advantage of time means\u00a0your money compounds at a lower rate<\/a>\u00a0or not at all. That’s very hard to overcome later in life.<\/p>\n

The late saver then tries to do exactly that \u2014 to turn back the clock and make up for missing time. That investor then tends to take on too much\u00a0risk\u00a0for his or her own good, always pushing the envelope on their investments.<\/p>\n

A few early successes is even worse. It’s easy to become convinced of your own investing acumen and to then\u00a0confuse skill with blind luck<\/a>. Until, of course, the luck runs out. Even then, we tend to blame the markets, or the government, or the banks, anyone but the person making the actual investments \u2014 ourselves.<\/p>\n

How can you learn your own\u00a0risk\u00a0tolerance? It’s not that hard, really. Here are four basic questions any financial advisor would ask:<\/p>\n

1. How long until you need this money?<\/strong><\/p>\n

If you have 30 years to save and invest, it’s likely that\u00a0you can handle a few market setbacks<\/a>\u00a0along the way. This assumption changes a lot if you are just five years away from retirement.<\/p>\n

2.\u00a0How long do you expect to work? To live in retirement?<\/strong><\/p>\n

Many people get to retirement age unready to quit working or unable to do so, having saved too little. If work is part of your retirement plan, you might be able to take on a little more\u00a0risk\u00a0than most investors your age. Also, consider\u00a0how long you might live in retirement<\/a>. Running out of money in your later years is an avoidable outcome.<\/p>\n

3. How do you react when markets go up?<\/strong><\/p>\n

Joy? Champagne? Shopping sprees in celebration? Remember that you haven’t actually made any money until you sell those assets, and that might not be for decades to come. Likewise, some investors take a rising market as a sign to invest more heavily,\u00a0even if stocks seem expensive<\/a>.<\/p>\n

4. How do you react when markets go down?<\/strong><\/p>\n

Dread? Depression? Fear? Remember, you also haven’t lost any money unless you sell at a bottom. Likewise, investors tend to avoid investing as stock prices fall, which is contrary to\u00a0the whole concept of “buy low and sell high.<\/a>”<\/p>\n

Correctly measuring investment\u00a0risk\u00a0tolerance is an important part of the any\u00a0long-term retirement plan<\/a>. Get it right, and you can insulate yourself from the kinds of emotional trading mistakes that plague retirement savers.<\/p>\n","protected":false},"excerpt":{"rendered":"

Most people, once they get safely past their teenage years, have a pretty concrete list of risks they don’t care to take. Skydiving, for instance, is either on your bucket … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7500,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3],"tags":[62,42,43,37],"yoast_head":"\nUnderstanding Your Investment Risk Tolerance | MarketRiders<\/title>\n<meta name=\"description\" content=\"While we tend to get better at assessing risk as we get older, except financial risk. 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