Investment Risk Tolerance

Simply put, your investment risk tolerance is the amount of stress you experience when your account declines. In other words, how do you feel if your account declines five percent? How about ten percent? What about 20 percent?

If you invest too aggressively for your risk tolerance, then at some level of decline you may reach a breaking point. When that point is hit, many investors feel the need to sell their investments in order to protect themselves. As a result, they make the classic mistake of selling out right at the market bottom just before the market rebounds. This causes them to lock in their losses and miss out on future gains.

Investors have no problem watching their portfolio go up. Most mistakes are made when the markets go down. Setting your risk tolerance before you invest helps you to avoid those costly mistakes.

If your risk tolerance is set too low, you won't generate the returns you should. If it is set too high, should market conditions become difficult, you will feel pressure to sell your investments, which could cause you to miss out on superior long-term returns.

Risk Tolerance needs to be set at the right level for each individual investor. Couples should each take the test individually, and then combine the results, in order to identify what both individuals will be comfortable with.

Determining your risk tolerance can be difficult. Setting a proper objective risk tolerance level will help you avoid making emotional decisions during difficult markets. We have put together a 10-question survey that will help identify yours. Click on the link below to complete this short, but effective survey.