Determine your risk tolerance by analyzing these 3 factors
As an investor, you likely dedicate countless hours to gaining a better understanding of market trends, whether that means watching financial TV shows periodically or keeping up with investment publications on a weekly or even daily basis. While these strategies may give you a way to assess certain stocks and ETFs or market sectors for potential gains, you could benefit from turning a similarly critical eye toward your own investment practices every once in a while.
This notion was the subject of a April 2 article published in U.S. News & World Report that aimed to help investors understand ways they can assess their risk tolerance.
According to the source, risk tolerance is "a measure of how much risk you can handle as an investor." And though it sounds simple conceptually, before you can determine your risk tolerance level, you'll want to first assess:
• How far away your financial goals are. The source says you should take into account the time frame in which you're trying to meet major financial milestones like buying a house or entering retirement. For example, more conservative risk levels may be right for those nearing these goals.
• How much you can afford to lose. This entails more than ensuring you have the capital to handle losses, according to the report. It also means determining whether you can keep up with necessary financial planning, like putting money into your IRA in the event that your portfolio takes a loss. You could decide on an overall amount you feel you can afford to lose, say 2 percent. However that's often not enough in our evolved stock markets, as the risk for the particular equity has to be also factored in. That's why, at SmartStops, we introduced our Risk Based Position Sizing Calculator, a tool designed to help you make this determination.
• Your emotions. The ability to deal with risk on a personal level should also be considered. While it's certainly true that investors need to take on risk in order to seek rewards, too much risk can lead to anger and stress, which could negatively impact your life in other areas.
Once you determine your risk tolerance, invest in stock portfolio management software that can help you manage your equities. Our Market Risk Barometer can be a vital tool that enables you to make more informed decisions regarding timing investments in specific markets or sectors.