Please read "What's Your Risk Tolerance?" (Links to an external site.) Links to an external site. from the Investopedia site. Based on the article, what is your risk tolerance for investment risk? Are you a conservative, moderate, or aggressive risk taker? and what are the pros and cons of each? I encourage you to speak your mind and have an opinion. There is no wrong or write answers in discussions just jump in and be heard. Express yourself and if everyone else does the same it will contribute to the overall body of knowledge and we all learn.
Risk Tolerance by Time frame
An often seen cliché is that of what we'll refer to as "age-based" risk tolerance. It is conventional wisdom that a younger investor has a long-term time horizon in terms of the need for investments and can take more risk. Following this logic, an older individual has a short investment horizon, especially once that individual is retired, and would have low risk tolerance. While this may be true in general, there are certainly a number of other considerations that come into play.
First, we need to consider investment. When will funds be needed? If the time horizon is relatively short, risk tolerance should shift to be more conservative. For long-term investments, there is room for more aggressive investing.
Be careful, however, about blindly following conventional wisdom. For example, don't think that just because you are 65 that you must shift everything to conservative investments, such as certificates of deposit or Treasury bills. While this may be appropriate for some, it may not be appropriate for all - such as for an individual who has enough to retire and live off of the interest of his or her investments without touching the principal. With today's growing life expectancies and advancing medical science, the 65-year-old investor may still have a 20-year (or more) time .
Careful Consideration of Risk Tolerance
There are many things to consider when determining the answer to a seemingly simple question, "What is my risk tolerance?" The answer will vary based on your age, experience, net worth, risk capital and the actual investment or trade being considered. Once you have thought this through, you will be able to apply this knowledge to a balanced and diversified program of investing and trading.
Spreading your risk around, even if it is all high risk, decreases your overall exposure to any single investment or trade. With appropriate diversification, the probability of total loss is greatly reduced. This comes back to preservation of capital.
Knowing your risk tolerance goes far beyond being able to sleep at night or stressing over your trades. It is a complex process of analyzing your personal financial situation and balancing it against your goals and objectives. Ultimately, knowing you risk tolerance - and keeping to investments that fit within it - should keep you from complete financial ruin.