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What Is Risk Tolerance?

Learn about risk tolerance in this Howcast finance video with expert Gregory McGraime.


Your risk tolerance is really important when it comes to investing. Because after all, you have to decide on how much risk to take when it comes to your investments and what's also challenging about your risk tolerance is that it means different things to different people. If I'm investing one hundred dollars, risk to some people means I lost everything. To other people, risk might mean that my hundred dollars is now worth ninety dollars, and yet, a third way people might view risk is that I was expecting my hundred dollars to grow to a hundred and ten dollars and it only grew to a hundred and five dollars. So risk tolerance really can mean a lot of things to different people. But I want you to focus on a few things as it relates to your risk tolerance. How comfortable are you with investments? Um, first of all, if you don't understand the investments that you're putting money into, that's a formula for disaster. So you want to stick away from that. But as it relates to investing in stocks and bonds and other types of investments, what are you comfortable with and what aren't you comfortable with? For most people, it can make sense to balance out their risk tolerance by investing in different types of investments. Some that are aggressive and growth oriented, and some that are very conservative, um, as a way of balancing out their risk. But it's important and I wanna ask you, if you invested ten thousand dollars today, what would be too much risk for you? Where are you comfortable with it? The markets here, they're gonna go up, they're gonna go down and a lot of that is out of your control. But you can make sure you're following an investment plan that makes sense for your situation as based on your risk tolerance. It's kinda the sleep at night factor if you will. You know, if you're the type of person and you have that personality where you do your investing, and it's out of sight out of mind, you're not thinking about it too much, then perhaps you can invest a little more aggressively. If you're up at night worried about investments and the stock markets stressing you out, and you're reading about it on the internet or in the newspaper; maybe you're complaining to your spouse about it, that can be a sign that you're investing to aggressively for your personal tolerance for risk. And so the key factors when you're choosing investments are gonna be always, how you feel personally about risk and what the rest of your situation looks like before choosing any investments or before investing your money.

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