There are a lot of different things that people will tell you to “look for” when it comes to picking investments. Most of them are outward-facing, meaning that they’re concerned with the investment itself. The most critical, however, requires you to look inward – and it can be summed up in one simple-yet-essential word.
The Ins and Outs of Risk Tolerance
Generally speaking, risk tolerance is exactly what it sounds like: the degree of risk that you’re willing to take on when making any type of investment, either on a short or long-term basis.
Maybe the most critical thing to understand is that ALL investments come with a certain degree of risk – anyone who tells you differently is probably trying to sell you something. But you also need to understand that your own risk tolerance will change as you reach different stages of life, particularly with regards to a long-term goal like retirement.
If you’re still a young person with no children and retirement is literally decades away, you can afford to buy into riskier investments than average. They offer higher potential rewards if everything goes as it should, but they’re also more aggressive. The highs will be higher and the lows will be lower, but that’s okay – it’s not like you’re retiring tomorrow.
If you ARE retiring soon, on the other hand, the situation is basically inverted. You need to be thinking about low risk investments because even modest fluctuations can have a big, big impact on your ability to retire in comfort.
To find your own personal risk tolerance, consider any investment within the context of these three qualities:
- The length of time it will take to require any losses if they should occur.
- Your own future earning capacity – meaning, how long before you retire?
- Your existing assets like real estate, other investments, businesses you may own and more.
Never, under any circumstances, bet on an investment that falls outside the bounds of your own personal risk tolerance. Don’t let anybody convince you to do so, either – this is one of those situations where the stakes of “getting it wrong” are far too great to ignore.
If you’d like to learn additional information about the ins and outs of risk tolerance, or if you’d just like to learn more about other investment concepts that will impact your own long-term planning, please don’t delay – contact Fortified Retirement today.
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