Before you get too far along in expanding your investment portfolio, you need to have an honest conversation with yourself and identify your investment risk tolerance level. There are very few investments that are totally risk-free. And there are others that have valuations that can fluctuate wildly up or down on an almost daily basis.
Green Wealth Belt (GWB)
The notion about risk is that the greater chance you take the more money you could potentially make (or lose). Of course, the normal human reaction is that you want to earn huge profits and never risk losing anything. Ahhhh, if that were possible.
Since it’s not, you have to do some self-diagnosis of your own mental wiring. You have to figure out what percentage or dollar loss in your portfolio would cause you to lose sleep and increase your stress level significantly.
One of the starting points or questions that I was always asked is, “If a single investment of yours dropped in value by 20% or more would that set off your panic meter and freak you out?”
If the answer to that question is yes, it probably means that you would rather not get involved with super aggressive investments even if the potential upside sounds sweet. If your answer is no, then extend the question to 2 or 3 of your investments, all the way to your entire portfolio.
Take the Investment Risk Tolerance Quiz
So to help you get in tune with your risk level, I want you to think about and answer the questions below. Once you know the answers to this investment risk tolerance quiz, you’ll know how to allocate your funds going forward.
What percentage of your money would you be willing to put a significant in an investment? Think about your current portfolio and how much you’re socking away every month.
Some people will examine their situation; consider the possible gains vs losses, and say, “No worries, I’ll risk 20% or more because I’m in this for the long haul.” Other people will say, “Heck no, that investment could be a dead horse that never comes back.” So one person might classify themselves as aggressive and the other person conservative. And yet a third person might find that their risk tolerance falls somewhere in the middle.
Would you be okay with not receiving any income from your investments to live on?
This could apply to someone who is retired or near retirement, but not always. There are lots of people who supplement their lifestyle with investment income. So how long could you survive and pay your bills if the income from your investments stopped? Does this potential scenario have an impact on your risk tolerance level?
When it comes to making a specific investment, how quickly do you jump aboard? Do you immediately know if it’s doable or not? Do you already know which types of investments are right for you?
Depending on the level and type of research and analysis that you perform, this could help you assess your risk tolerance.
What is your knowledge and experience level when it comes to investing?
If you’ve been involved with investing for many years, then you are probably in a good comfort zone as far as knowing the pluses and minuses of certain investments. Having a high degree of confidence in what you’re doing probably means that you can tolerate a higher level of risk without freaking out if the value ticks down a bit because you know it’ll come back.
On the other hand, if you’re new to investing, your confidence in choosing specific investments may not be strong. As a result, your risk tolerance level might be low, thus causing you to select less aggressive investments.
What is your age and net worth?
When you’re in your 20’s you can afford to have a higher risk tolerance level. That’s because your portfolio has a much longer timeframe to bounce back in a big way than someone who is age 55. This is why experts counsel young adults to be aggressive when building their retirement portfolios. And if your net worth is pretty high, that gives you even more room to be patient.
Based on all your answers to the above questions, what is your general risk tolerance level?
High (Aggressive), Medium (Moderate), Low (Conservative)
So there you have it, important questions that can shape your financial future. Take them to heart and answer with honestly. No one is watching. But the answers you provide will more than likely affect your entire family for many years.
- Take the Risk Tolerance Test to identify your risk tolerance level for investing
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