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Introduction to Investing: Risk Tolerance

Investing can be difficult to get into. With its many facets and constantly shifting nature, many people shy away from the idea of investing in favor of standard savings accounts. But there’s a great deal of opportunity investing can provide, namely in the form of growth over time. But where to start? This question really depends on the individual, but the best way to find out is by assessing your risk tolerance.

What is risk tolerance?

So now you may be asking yourself; what is risk tolerance? To put it simply, risk tolerance is a person’s ability to withstand shifts in the market. The market is constantly in a cycle of rising and falling, and it’s those with a high risk tolerance that can better handle these. But anyone can invest nonetheless, your risk tolerance just provides a guide on what sort of investments you may want to take. To even further define, a high risk investor would find themselves more comfortable with the value of their stocks falling in the short term, typically because they’re able to invest for longer (they can typically afford to completely lose some or all of their investments, too). This again serves merely as a guide of sorts, but it’s typically ill-advised to invest funds that you can’t afford to lose or might need in the immediate future.

Types of investors

By assessing your risk tolerance (which you can do using any number of questionnaires available online), you’ll typically find yourself fitting one of three investor categories, which are as follows:

Aggressive investors - These investors have an exceptionally high risk tolerance. They are willing to take higher risks in the hopes of higher returns and they typically have a longer amount of time to allow their investments to grow. These investors will often follow growing trends and aim for the highest growth potential, no matter the investment type.

Moderate investors - These investors sit somewhat in the middle (hence the moniker of “moderate”). They are willing to take risks and often have a decent bit of time to ride out their investment, but might be wary of any investments that could reduce their initial investment. Moderate investors typically favor more stable investments, albeit they can recognize growth potential when they see it.

Conservative investors - Conservative investors have the lowest risk tolerance, but not necessarily to their detriment. These investors prefer to take far fewer risks as a means of protecting their initial investment, and typically prefer investments of high liquidity (i.e. they can easily be converted into cash). Conservative investors find themselves drawn to much more established investments and aim for stable growth, even if it may not be the highest available returns.

What does this mean for me?

So now it begs the question, what does this all mean for your investing future? Perhaps not much, really. These categories are merely a guideline that you are not obliged to follow. Conservative investors are welcome to make high-risk investments and aggressive investors might allocate large sums of money to more stable investments. Knowing what category you fall into at least gives you some food for thought, and perhaps a path to start upon. But the type of investor you are is of course subject to change over time, so it’s absolutely important for you to be frequently assessing where you stand, in case you may need to change your investing methods. Most investors prefer to diversify, spreading the risk across several investment types, and chances are how much is invested where is subject to change as they continually assess their goals and position in life. For more information on risk tolerance check out www.investor.gov