Determine Your Risk Tolerance

Firstly, please take note of this statement “any money you are not prepared to lose, DON’T INVEST.” For any business you invest in, there is a possibility of it crashing or collapsing. Examples of such business include stock trading, real estate,commodity market, oil industry and so on.

Every individual has a risk tolerance level and it’s important that that should be put into consideration in all investments. A good stock broker or financial adviser should try to help you determine what your risk tolerance level is. Then, they should work with you to find investments that do not exceed your risk tolerance.

Several factors can be used to determine one’s risk tolerance.

 First, how much money do you have to invest, and what is your investment and financial goals. An example is, if you plan to retire in five years, and you’ve not saved anything, you need to have a high risk tolerance – because you will have to do some aggressive risky investing to reach your financial goal.  This doesn’t mean you should invest in wonder banks or high yield investment programs or get involved in shady businesses.

However, if you are in your twenties and you want to start investing for your retirement, your risk tolerance will be low. You have ample time to watch your investment grow.

Also a person with N5 million would certainly have a different plan than someone with N5000.

Check out this scenario, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do? Would you sell out or would you watch and see how things unfold? If you have a low tolerance for risk, you would want to sell out and if you have a high tolerance, you would watch what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. They are both related.