“Risk” – what is it? Where is it? Are you immune to it? How much “risk” can you stomach or tolerate?
All are great questions. When it comes to investing we are narrowing our focus to that of two risks, risk tolerance and risk capacity. Well, there is third too, risk as a necessity.
“Risk Tolerance” is an attempt to understand what you as a person or a couple can stomach for your investments. A term to help us understand this is “volatility”. Volatility as it relates to the stock market is looking at how much the market moves. Meaning upward and downward direction. If the market is goes up several percent in a week and then down several percent, possibly even double digits, that would be volatile in a short-term perspective.
Then looking at a time horizon, or say 6 months to 10 years – how much up and down can you tolerate?
There are a handful of questions that help distinguish your personal tolerance.
This is an initial step in determining how to manage your investments. Please answer the following questions candidly. Don’t over think it – go with your initial response, your gut as it might be called.