What is Investing Risk Tolerance?
Understand your risk tolerance.
I get it, investing is risky. And feels scary. And overwhelming. You want to make money but also don’t want to lose it in the process. Not to mention, you didn’t grow up seeing many investors of color so putting money into a system you’re not 100% familiar with can feel scary AF!
However, we can’t let fear keep us from growth-whether that be personal or financial. In my younger years I would say I was more risk-averse, and now I welcome it. Maybe age and life experience has changed that for me. Taking calculated risks has led me down some amazing paths, and this includes the stock market. To be a great long term investor requires some emotional stamina; the ability to hold on and ride the ups and downs. The longer your money sits in capital markets, the more time it has to grow. But before you dive in and start buying assets, you need to consider your risk tolerance.
What is risk tolerance? Risk tolerance is your ability to stomach a decline in your portfolio. Risk tolerance is the level of risk you’re willing to take. Your risk tolerance also has to do with the outcome you’re looking for. More risk is a potential for more reward. Less risk is the potential for a lower reward. Even though we’re specifically speaking about the stock market, doesn’t this idea apply to everything in life? We all have to take risks at some point. Especially if you’re a person of color.
Here are some questions to ask yourself. The stock market will have its ups and downs, so how will you manage those times? What is your comfort level? There have been several periods in history in which the value of the market has dropped 30% or more in a year. If the value of your portfolio fell by 30% in one year, how would you react? What feelings come up? Different assets will have different risk levels so it’s important to ask yourself these questions.
Investing by Risk Tolerance
What’s the difference between aggressive and conservative?
High Risk Tolerance (Aggressive)
Investors with a high risk tolerance will typically have a portfolio that may be composed of 90% stocks, and 10% bonds. This is because they are comfortable with the volatility of stocks and trust eventually the market will rebound. Aggressive investors are seeking the highest possible return and are willing to accept the extreme fluctuations. Since they are looking for growth, they are willing to take the risk of a market decline.
Low Risk Tolerance(Conservative)
Investors with a low risk tolerance will typically have portfolios that may be more conservative, with possibly 70% bonds, and 30% stocks. Bonds pose a lower risk than stocks, but they also have less growth potential. Conservative investors are willing to accept the lowest potential returns for more stability and the least amount of fluctuations.
Investing by age
When it comes to investing, time is your best friend. Your assets need time to grow in the stock market. Typically, younger investors will be more aggressive investors because time is on their side to recuperate unrealized losses. The younger you are, the more time you have for your assets to grow before you need to sell. Younger investors may see portfolios composed of 90% stocks, and 10% bonds.
The older you get, the less time your money has to grow, which also means the less time you have to recuperate your losses if a market downturn were to happen. This is why the older you get, the less stocks and more bonds you want to see in your portfolio to minimize risk and protect what you’ve accumulated.
This is why TIME IN THE MARKET matters! The younger you can start, the better! But no matter what age you are, get started investing! It’s never too late to start.
This information is for educational purposes only! Make sure to speak to a professional about your personal risk tolerance and asset allocation!
