In investment and finance, risk tolerance means the investors willingness to accept a high risk client, while hoping that the investment will increase in value. Your risk tolerance will depend on your own personal situation and life experience. Many younger people are much more likely to take a high risk investments than an older, retired person. There are many ways of finding out your risk tolerance, a lot of which are available online. One of the most important factors when considering your risk tolerance is to be honest. Many people lie when being assessed, which will lead to them making poor decisions.
As well as risk tolerance, there is also risk capacity. Risk capacity is decided by your personal financial situation, and is generally something more flexible than risk tolerance. When you are working out your risk tolerance you need to bear in mind your goals, timeline and when you plan to withdraw the money you’ve invested will all impact your decision. Basically, the more time you have to play with, the bigger a risk you can take – as you have more time to recover if you suffer any losses. The nearer you are to your goal, the lower you want your risk to be as you want to work on preserving what you have already got rather than risk losing everything at the worst possible time.
A lot of financial advisors often say that clients who are being assessed for their risk tolerance say what they think they should say rather than what they actually feel. This will lead to an inaccurate and unrealistic results, potentially putting you at a greater risk than you are comfortable with. One of the reasons that people don’t produce accurate results is because they don’t know enough about the financial world. They don’t lie intentionally to produce bad results, but they simply guess the answers in order to make them sound like they know what they’re talking about.
Not only does this mean the results you get aren’t accurate or suited to you, but it puts your financial advisor in an awkward position because they can’t help you completely. They have to rely on the information that you give, so if that information is false they won’t be able to give you the proper advice. Things to bear in mind when assessing your risk tolerance are to remain completely honest – even if this means admitting you don’t know something. Remember that retirement is not always the end goal – remember any expenditure that you will undertake before retiring. Don’t try and push yourself to take on more than you are comfortable with – at the end of the day you will be responsible for your own investment and therefore you should consider it extremely carefully before making any life changing decisions. Even if you think you can take on a high risk investment – talk to an advisor and make sure your goals are in line with the investment.